On a cold winter’s morn in December 2015 the global community came together in Paris and agreed to play it cool. The 197 nations assembled committed to arresting the earth’s temperature rise to 2C, with a nod toward 1.5C. That may not sound like much – the difference between a tepid shower and a slightly less tepid shower – but at a global level it could well be the difference between a liveable planet and a far more chaotic world.
The Paris Accord was in effect a roadmap, setting out the commitments of each state, both to reduce carbon emission and to fund measures to address the consequences of climate change. So what makes this treaty different from the plethora of climate rules, regulations, decisions, directives, treaties, and agreements both bilateral and multilateral?
The Paris Agreement empowers, rather than instructs, its signatories. Each country determines its own method to meet its contribution, and each contribution takes into account the ability – both physically and financially – of countries to cut their carbon. Encompassing, as it does, nearly every country on the planet, the Paris Agreement gives states the assurance needed to reduce emissions in the knowledge that others will reciprocate.
The Paris Agreement empowers, rather than instructs, its signatories. Each country determines its own method to meet its contribution, and each contribution takes into account the ability – both physically and financially – of countries to cut their carbon.
The approach of the EU is a case in point. The EU currently has a binder full of rules covering every aspect of energy and climate change from regulations that govern the emissions from major power plants to directives that set the efficiency of your fridge. There are more than 60 such EU regulations, directives and decisions which have a bearing upon climate change. While each of the rules shares a common ambition – to reduce carbon emissions – there is an unintended perversity that results from so many laws. Setting aside the bureaucracy, compliance costs and uncertainty for business that stem from their regular revision, there is one serious issue: the rules often undermine each other, creating redundancy, inefficiency and confusion.
I am currently leading the reform of the EU’s Emissions Trading Scheme (ETS), often billed as the EU’s “flagship climate change tool”. When it was instituted back in 2005 the ETS, which seeks to monetise carbon emissions thereby driving emission-reducing innovations, was cutting-edge. Every emitter had to possess enough permits to continue to emit. The less they emitted the fewer permits they needed. The permits were traded and revenues, which could be used to invest in further decarbonising measures, were raised. It was cutting edge. Now it isn’t. When it began the carbon price was 30 euros. Today it is six. Then it was a driver, now it is a surly passenger.
Despite the ETS celebrating ten years of operation, a lack of demand for allowances has kept the carbon price so low that there is no incentive to innovate. At not much more than the price of a cup of coffee, businesses would rather pay the token costs than invest in decarbonisation. While certain of the problems are structural – and my reforms are trying to address these – the chief issue was the financial collapse of 2008, which drove down output from energy intensive industries and energy producers, and with it demand for carbon permits. (The financial crisis in fact was perhaps the most significant contribution to decarbonisation since the millennium.) The oversupply in the market – 2.5 billion unwanted allowances – is still with us, holding the carbon price hostage at a Starbucks level.
However, there are serious challenges for the functioning of the ETS that have little to do with the ETS. Indeed they are a consequence of the success of the other climate change policies of the EU. For example, EU rules state that every member state must produce 30 per cent of its energy from renewable sources by 2030. To meet this target, states have unilaterally begun to phase out coal from the energy mix, or in the case of the UK have set a minimum price on energy derived from fossil fuels. While these policies have driven growth in renewables, they have further dampened an already dismal demand for carbon allowances. Nobody is quite certain by how much the overlapping EU polices and regulations have depressed the carbon market, but estimates range from 700 million to a billion redundant allowances.
Allowing market forces to determine the cost of carbon polluting is the best way to incentivise decarbonisation while maintaining jobs and economic growth. Ideally, the EU’s carbon reduction policy would consist solely of a carbon market with all major polluters under its ambit, from cars to ships, coal power stations to steel manufacturers. Not only would the carbon price reflect the actual cost of polluting, but economists argue that this bigger market would generate greater actual emissions reductions.
The distortions in the market undermine it. Allowing market forces to determine the cost of carbon polluting is the best way to incentivise decarbonisation while maintaining jobs and economic growth. Ideally, the EU’s carbon reduction policy would consist solely of a carbon market with all major polluters under its ambit, from cars to ships, coal power stations to steel manufacturers. Not only would the carbon price reflect the actual cost of polluting, but economists argue that this bigger market would generate greater actual emissions reductions.
The chances of this happening, however, are slim. The EU has an incurable thirst for new regulation and the directorate general for climate change is no exception. The recently published “clean energy package” consists of no fewer than 1,000 pages of new regulation. The effect on the ailing carbon market has yet to be calculated.