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The International Energy Agency (IEA) Executive Director Maria van der Hoeven has said that Emissions Trading Scheme (ETS), the EU’s carbon trading mechanism, should be flexible enough by itself and not require political interferences.
Speaking newspersons on the sidelines of the 4th Clean Energy Ministerial, van der Hoeven said that she cannot predict the implications of the reported decision taken by the European Parliament to reject a plan to rescue the EU’s ailing carbon trading scheme.
ETS was the first large emissions trading scheme in the world, and remains the biggest. It was launched in 2005 to combat climate change. A cap is set on the total amount of greenhouse gases that can be emitted by all participating installations. Allowances for emissions are then auctioned off or allocated for free, and can subsequently be traded.
Simply put, if an installation has succeeded at reducing its emissions, it can sell its leftover credits. This allows the system to find the most cost-effective ways of reducing emissions without significant government intervention.
As of January 2013, the EU ETS covers more than 11,000 factories, power stations, and other installations in 31 countries.
According to reports on Tuesday, EU members narrowly voted against a backloading proposal that would have cut the huge surplus of allowances currently being traded. Because of this, the price of carbon on the EU ETS has plunged further, reports said.
European Commission in an attempt to push up the price and make low carbon investments more attractive proposed withholding significant amount of tradable allowances from the market over the next five-seven years. The hope was that this backloading proposal would promote scarcity and would drive up the price.
They said that backloading would put many companies at a significant competitive disadvantage to businesses in the US which have gained from lower energy costs mainly because of shale gas.
For emerging markets where the concept is yet to take off or has taken initial steps, the drop in sentiments would have an adverse impact.
The scheme has been divided into a number of trading periods. The first ETS trading period lasted three years, from January 2005. The second trading period ran from January 2008, coinciding with the first commitment period of the Kyoto Protocol. The third trading period began in January 2013 and will span until December 2020.
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