Climate change: Obama talks it up; EU market down

During his inaugural address on Monday, US President Barack Obama committed himself to a European priority that was shoved to the background during his first term in office: Fighting climate change.

“We will respond to the threat of climate change, knowing that failure to do so would betray our children and future generations,” Obama said. “Some may still deny the overwhelming judgment of science, but none can avoid the devastating impact of raging fires, and crippling drought, and more powerful storms.”

Those words were music to the ears of many in Brussels, who had assumed – wrongly, it turns out – that the White House was poised four years ago to join the EU’s campaign to forge an ambitious global climate treaty.

The irony of Obama’s climate pivot is that it was announced on the same day when the price of carbon in the EU’s emissions trading scheme fell to an all-time low, offering a distressing reminder about the disarray in a market that is the centrepiece of Europe’s climate policy.

An EU carbon allowance, which gives its holder the right to emit a tonne of pollution without penalty, was trading at less than €5 on Monday, according to Thomson Reuters Point Carbon, which monitors the market. That is just a fraction of the price that the market’s architects had envisioned when they launched it in 2005.

With prices so low, there is little financial incentive for companies to invest in new technologies, such as carbon capture and storage, that would allow them to operate with less pollution. Executives from some ofEurope’s biggest companies, such as E.On and Shell, have been saying this for months – as have worried members of the European parliament.

“The EU’s flagship climate change policy is at risk of total collapse,” Bas Eickhout, a Green MEP from the Netherlands warned this morning.

In another timely reminder of the market’s flaws, Transport & Environment, a campaign group, released a new study today claiming that the market would allow airlines to reap up to €1.3bn in windfall profits.

That is because airlines, which only recently joined the system, have been given most of their needed allowances for free while many have passed on the costs to passengers in the form of ticket surcharges. So rather than penalising polluters or nudging them to be more efficient, the carbon market may actually been lining their pockets.

“Yes, to some extend they’re making windfall profits out of it,” a spokesperson for Connie Hedegaard, the climate commissioner, acknowledged on Monday. There is little the commission can do to stop that, the spokesperson said, noting that it was a private matter for airlines to determine how they price their tickets.

But Hedegaard has tried to tackle the larger problem afflicting the market, which is a surplus of carbon allowances. Much of this has resulted from the economic crisis, which has damped industrial activity acrossEurope.

Last year, Hedegaard proposed a temporary fix by delaying the auction of some 900m carbon allowances. Rather than dumping them on the market from 2013 to 2016, as originally planned, they would be withheld until 2017 to 2020.

Eickhout and others are sceptical. “Merely postponing the auctioning of 900 million permits is clearly not sufficient,” he argued. “Returning 900 million permits to [the carbon market] at a later date would be like pouring water back into an already overflowing bathtub.”

Hedegaard has also proposed a menu of more far-reaching fixes. These include withdrawing some allowances from the market altogether, or asking member states to commit to ambitious targets for reducing their emissions beyond 2020. In theory, new targets should send a clear message to the market about the EU’s long-term climate policy and thus support higher prices.

It remains to be seen whether member states will endorse these ideas. Poland, which relies on coal for most of its electricity, is staunchly opposed. Some are wary of taking tougher climate commitments in the midst of a recession. Others do not like the idea of meddling in the market.

The debate is heating up ahead of a European parliament vote in late March or early April. If Washington is serious about re-launching its climate policy, then it will be paying close attention.