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Clean energy needs all of phase III emissions auction cash - Dutch official

06 Mar 2013 18:09:11 | edcm

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All phase III auction revenues of the EU's emission trading system (ETS) should go towards financing innovation in member states, rather than to reducing their budget deficits, a Dutch official said on Wednesday. This would help counter the risk of carbon leakage that accompanies a higher carbon price, she said.

Clean energy technologies, for instance, rely on innovation to help curb future carbon emissions. However, they are expensive to fund. Channelling money from the auctions would be one way to pay for such developments.

But as Europe's member states have faced difficult economic times in recent years, some countries could be tempted to use the cash generated by the auctions to boost state coffers.

"The ETS is not meant to take the money from the companies; it's meant to be an incentive for innovation," Dorette Corbey, president of the board of the Dutch Emissions Authority, told ICIS at the Argus European Emission Markets conference in Amsterdam.

She said that other measures, such as a carbon tax, fail to be real alternatives to the EU ETS as an efficient carbon-cutting tool. But current carbon prices are below the level needed for the scheme to function, she said, which would require a carbon price of €30.00-40.00/tonne of CO2 equivalent (tCO2e). On Tuesday, the benchmark EU allowance (EUA) contract closed at €6.20/tCO2e, according to ICIS data.

The European Commission's proposal to back-load some 900m EUAs could only marginally fix this state of affairs, Corbey said.

"Although there are very good reasons to believe that such intervention [back-loading] can help to boost the price of CO2, questions remain on how effective this would be."

Carbon leakage risk

She outlined two reasons for her scepticism over the back-loading.

Firstly, as the ETS is regional rather than global, higher carbon prices within the ETS could prompt companies to seek better returns elsewhere.

"All measures to make the EU ETS more expensive for companies would invite them to rethink their investment policies. Energy-intensive companies would consider moving new investments outside the EU and this does not help to prevent global warming."

Secondly, global energy prices are diverging as the shale gas boom in the US has lowered demand for coal, thus depressing prices, which means that carbon prices would have to rise significantly before they offer a real incentive for switching to cleaner generation.

As the back-loading of 900m EUAs may trigger a temporary price rise, only a more ambitious cap would prop up carbon prices sufficiently in the long term, Corbey suggested.

But tighter caps would have to be coupled with measures to reduce the risk of carbon leakage, she said. Carbon leakage occurs when greenhouse gas emissions from any given sector increase in regions outside a carbon trading area as a result of that bloc's environmental rules.

The risk of carbon leakage emerged at a carbon price of around €20.00-40.00/tCO2e, Corbey said, but would differ by sector.

A primary way to counter the risk would be reinvesting EU ETS revenues into innovation, she said.

She also said linking the EU ETS with other systems should be explored. Silvia Molteni

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