The 21st Century climate challenge

Prospects for the second phaseWill these problems in the EU ETS be correctedin the second phase, which runs from 2008to 2012? While the scheme has been strengthenedin some areas, serious problems remain.Governments have not seized the opportunityto use the EU ETS to institutionalize deepcuts in emissions. Most seriously, the schemeremains de-linked from the European Union’sown emissions reduction targets for 2020.Allowances have so far been approved for22 member states. 52 The cap for these countrieshas been lowered: it is around 10 percent belowthe level set for the first phase and marginallybelow verified 2005 emissions. There is alreadyevidence that markets are responding to strongerpolitical signals. Prices for Phase II allowanceson futures markets have recovered. Marketforecasts by Point Carbon anticipate a pricerange of €15–30/t CO 2(US$19–37/t CO 2),depending on the costs of abatement.These are positive developments. Evenso, when measured against the yardstick ofsustainable carbon budget management thedesign of the second phase of the EU ETShas to be judged quite harshly. The cap set for2008 to 2012 is just 2 percent below verifiedemissions for 2005. This is not compatible witha sustainable emissions pathway that would leadto a 30 percent cut in emissions by 2020 basedon 1990 levels. For most countries, the EU ETSsecond phase will not require major adjustments(table 3.2). An underlying problem is that the EUETS has been interpreted by European Uniongovernments as a vehicle for delivering on thevery limited Kyoto commitments, rather than asan opportunity to act on the 2020 commitments.This is despite of the fact that the mandate forthe EU ETS extends to “emissions developmentand reduction potential”. 53 Another element ofcontinuity with the first phase is auctioning.While the bar has been raised, there is still a limitof 10 percent on the share of permits that can bedistributed through auctioning, perpetuatinglosses for public finance and efficiency. 54Negotiations on the second phase of theEU ETS have highlighted a number of widerchallenges for the European Union. As longas cap-setting remains the remit of individualTable 3.2 Proposals for the European Union Emissions Trading Scheme2005 verifiedemissions underPhase II of ETS(Mt CO 2)Proposed bygovernment(Mt CO 2)member states, the battle to set more robusttargets will continue. Most governments soughtPhase II allowances above 2005 emission levels.The underlying problem is that cap setting at anational level is a highly political exercise thatopens the door to intensive, and highly effective,lobbying by national industries and ‘energychampions.’ So far, European governmentshave shown a tendency to succumb to pressurefrom highly polluting industries, with theresult that very weak limits have been placed onoverall emissions. 55 Bluntly stated, EuropeanUnion governments have been bolder in settingaspirational targets for 2020 than they havebeen in setting concrete emission caps under theactually functioning EU ETS.Against this backdrop, there is a strong casefor empowering the European Commission toset—and enforce—more robust targets alignedwith the European Union’s 2020 emissionreduction goals. Another priority is to rapidlyincrease the share of quotas that are auctionedin order to generate the incentives for efficiencygains and finance wider environmental taxreforms. Aiming at 100 percent auctioning byEmissions cap for 2008–2012 periodAllowed by EuropeanCommission(Mt CO 2)Allowed by EuropeanCommissionas % of 2005emissionsAustria 33 33 31 94Belgium 56 63 59 105Czech Republic 83 102 87 105Finland 33 40 38 115France 131 133 133 102Hungary 26 31 27 104Germany 474 482 453 96Greece 71 76 69 97Ireland 22 23 21 95Italy 226 209 196 87Netherlands 80 90 86 108Spain 183 153 152 83Sweden 19 25 23 121United Kingdom 242 a 246 246 101Total 1,943 a 2,095 1,897 98a. Does not include the United Kingdom’s installations which were temporarily excluded from the scheme in 2005 but will be covered in 2008to 2012, estimated to amount to 30 Mt CO 2.Source: European Union 2007c.3Avoiding dangerous climate change: strategies for mitigationHUMAN DEVELOPMENT REPORT 2007/2008 131