The price of carbon in Europe: more lip service, or a real tax?

In just a few hours the European Union will release its draft rules for Phase 3 of the Emission Trading Scheme. Everyone is waiting on word of whether the EU will force emitting companies to purchase all emission credits at auction. If this happens, then the ETS’s teeth will have grown longer and sharper.

The question is, will those teeth rip and slash carbon emissions, or will they maul the European Union economy? Certain heavy industries have been on a media blitz lately, warning of job losses in the tens of thousands if the ETS foists costs on European companies that their competitors don’t have to bear. The head of the German steel industry association told Agence France Presse that “if the law on certificate trading for carbon dioxide emissions is introduced as planned … no steel manufacturer will invest in Europe.”

All those who have been advocating carbon trading, or carbon taxation, will be watching the European Commission’s next move like a Leaf’s fan watches Cliff Fletcher. The ETS has up to now been a giant expectation-management exercise. The price a company pays for permission to emit each extra tonne of carbon depends on everybody’s definition of “extra.” “Extra” minus one tonne is that company’s emissions cap, which is established through an exercise that is part estimate, and part negotiation. The negotiation part is what has so far kept the market price of permits low: companies have tended to highball their estimates of emissions for an upcoming period, and their national governments have tended to support those estimates in dealing with the European Commission (which administers the scheme). And the EC has generally accepted them. So far.

This systemic leniency has led to permit proliferation, which has driven down the market price. Emitters therefore have had little incentive to reduce emissions.

But the EC has become stricter in approving member countries’ emissions estimates (see article). And now with today’s impending announcement on full auctioning of permits, the rubber is about to hit the road. Angela Merkel and Nicolas Sarkozy have both said they will protect their home industries from costs that render them uncompetitive.

So it’s down to a choice: fight climate change or defend jobs. My prediction is we’ll see more of the lip service that has served the EU so well in its self-congratulatory condemnation of the arch-fiend George Bush. The ETS’s teeth will stay short and dull.

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