The workshop was on the functioning of the emissions trading system (ETS) and the flexibility mechanism.

 

There was a clear consensus that the main impacts of the ETS will be felt in the future and that it is an important tool to reduce emissions. Some issues were raised to its security aspects. The panel and the audience were split on whether the Clean Development Mechanism (CDM) had been beneficial or not for the EU and the environment.

 

Felix Chr. Matthes, Research coordinator at Öko-Institut started with a general update and info background of the ETS. He said that there are a series of key features that one should bear in mind in regard to ETS:

·          There is a cap on greenhouse gas emissions from entities within certain regulated industries.

·          Permits are allocated to the different entities and these permits will not be free for much longer since they need to be bought.

·          It requires the entities to measures the greenhouse gas emissions they emit.

·          It allows for the trading of permits.

·          The regulated entities can use offsets.

·          The main purpose of the ETS is to put a unified price on carbon in the EU although it also allows one to measure the impact the CO2 price has through the production chain.

·          The ETS regulates half of all greenhouse gas emissions in the EU (including such things as power plants, steel mills, refineries etc).

·          There are non-ETS regulated sectors.

·          It has gone from the first and second phases which had their own caps, to the third phase during which there will be a linear reduction section.

·          The ETS is about decarbonising the economy since it is focusing on the future.

·          The ETS will not allocate free permits from 2014 onwards.

·          The ETS’s use of offsets increases the possibility of increasing greenhouse gas (GHG) emissions in the EU if the offsets are in developing countries.

·          The EU has banned certain types of projects included in the ETS scheme because it was impossible to ensure that the additional offsets were complemented by real reductions of GHG emissions in the host CDM country.

 

Jos Delbeke, Director General of the European commission’s DG CLIMA said that:

·          The OECD has been hoping for a long time to have more activity amongst its members when it comes to tackling climate change but things have slowed down (including in the US). Asia however is pushing forward.

·          The ETS debate is closely linked to the debate on the roadmap (i.e. whether to increase the reduction of emissions target from 20% to 30%, which, if it were to be implemented, would have an impact on the reduction of the carbon included in the ETS).

·          The ETS is soon to get a broader scope since it will include new sectors (such as aluminium and aviation by 2012).

·          In regard to the discussions on security problems (i.e. organised cyber-attacks on national registries, which made the EU decide to suspend trading on the spot-market (which is a minor part of the market) he said that all security problems have been solved and 19 Member State registries have been reconnected.

·          A tiny amount of allowances have been stolen and they are now being re-established. He also said that the integrity of the system has been untouched and that security is important.

·          Enhanced market oversight – what is the specific legal status of an EU allowance? Can we join in with the financial discussion? Intensive discussions with Commissioner Barnier have not yet led to a decision.

 

There is a consultation process coming up which will serve to clarify the proper market oversight provisions of the ETS market. Has the ETS been working? After eight years of operation it has been very challenging - the market has been reacting to important signals. The ETS market has been reacting to the Japan crisis by pushing up the price of carbon.

·          A consultation process will be coming up in regard to the possibility of enhanced market oversight of the carbon market, the specific legal status of an EU allowances and the clarification of the proper market oversight provisions of the ETS market that are needed.

·          The ETS has been working in the sense that its price of carbon has gone up or down depending on market events around the world (for example, the ETS market has been reacting to Japan’s nuclear crisis by pushing up the price of carbon).

 

Jo Leinen (S&D, DE) said that incorporating aviation into the ETS has been an important step.

Christian de Perthuis, Associate Professor, University Paris-Dauphine went through a number of theories from textbooks on economics to see if they applied in reality. According to textbook, he said that:

·          ETS gives a price on CO2. This was deemed to be correct (the volatility of the CO2 price is lower as a result of ETS).

·          ETS creates abatement – also viewed to be correct.

·          Carbon trading triggers low carbon investment – here it has been hard to find a link between the price of carbon and low carbon investments.

·          A cap and trade scheme has an impact on industries in the sense that it creates carbon leakage. It is impossible, up until now at least, to see any such carbon leakage but it is too early to draw a conclusion since, amongst other reasons, a lot of free allowances were given out in the beginning. He said that things could of course change.

·          A cap and trade scheme works independently of allocation rules. This seems to be false. Allocation rules matter.

·          The carbon market needs a particular regulatory framework because regulating this market is very difficult. This seems to be correct.

 

Simone Ruiz,European Policy Director at International Emissions Trading Association (IETA) talked about the different security concerns relating to the ETS. She said that:

·          There is a strong belief in the functioning of the ETS although the problem we have is a serious one because the fraud we have experienced has been bad. However, it does not mean the end for the ETS.

·          Last year there had been a number of fraud incidents that were due to bad governance.  This included such practices as the recycling of allowances, email flooding and VAT fraud and not all member states have addressed these issues.

·          All in all the total amount of credits stolen has been small but it has affected market confidence because you do not know if you will get good or bad allowances (this is particularly true as regards to the spot market although it also affects the futures market).

·         The reason why the fraudsters chose to go after the ETS is due to the fact that there is a lot of money to be made.

·         Certain registries have had very lax security even though the registries now have to fulfil certain security requirements.

·         A centralised monitoring system is needed to improve security.

·        The effects of the different crimes have not had any meaningful impact on the CO2 price thus far.

·        A consolidated regulatory framework from the Commission could help.

·        Some of the measures that could help in order to tackle the issue of fraud include: rapid notification when fraud has taken place, hotline during trading hours, transparency in the trading market, automatic freeze of stolen allowances, clean up and monitoring, flagging of unusual transactions (for example, small companies making big transactions), compensation to the victims etc.

·        The registration process is on a national level and as long as that is the case, big differences in the safety of the ETS may continue to vary between Member States.

·        In comparison to how cheap it would be to make all the registries much more secure, a lot of money has been lost.

 

Lena EK (ALDE, SE) thanked everyone for their speeches and asked:

·        Whether the ETS is working as a tool for change (i.e. a driver leading to new technologies).

·        What tools that can be used to regulate the ETS.

·        She also said that some companies are making windfall profits as a result of ETS and that maybe they should therefore not be on the market because they are not really profitable. In addition to this she made clear that we still have companies on the EU market thanks to the ETS.

 

Linda McAvan (S&D, UK) asked the Commission about the role of banking in the third phase of the ETS.

 

Bairbre de Brún (GUE/NGL, UK) asked what the need for stronger market regulation was and what impact this would have.

 

Yvon Slingenberg, head of unit on the Implementation of ETS, European commission’s DG CLIMA, said that:

·         The EU needs to move towards stock market conditions and that the Commission has adopted a communication on the carbon market which stipulates that the ETS market will be bigger in the future. It is when it has grown bigger that stock market rules will start to apply. The Commission is also working on enhancing market rules by looking at whether the Market Abuse Directive could be made to apply.

·         In regard to banking, which is indispensible for the ETS, the economic crisis has had an impact on the ETS. Due to the effect of the crisis there will be a buffer of unused allowances in the market, which will be phased in to phase three. She went on to say that, in response to the market price, companies should factor in current allowances into the future.

·         Concerning fraud and accounting standards the commission is working on banking security. It will be coming forward with proposals (i.e. comitology measures) that should make the ETS less attractive for fraudsters since, if the proposals are enacted, they would create barriers. In terms of dealing with stolen allowances, the Commissioner conceded that this would be difficult since property laws differ between Member States.

Prof Christian de Perthuis commented that:

·         Banking is essential for trading and to create a long term perspective since without it one would not take into account carbon restrictions. He also said that there are currently companies that benefit from the surplus allowances whereas others do not.

·         People never saw any problems in the spot market before the ETS started since they all believed the problems would be in the futures market.

·         A large part of the carbon market is already regulated by EU finance regulations but that we nonetheless need more specific regulation and a harmonised a legal framework.

Simone Ruiz said that:

·         With regard to insider trading, there is a gap in the spot market and that existing laws to prevent insider trading from taking place are not completely applicable to the carbon market, hence a lot of thinking is needed to adjust existing laws applying to the carbon market.

·         She would like to have a larger debate on the appropriate type of regulation, adding that more transparency would create a more accurate market price. She also stated that the EU needs to move towards a legal harmonised framework.

 

A representative from the European Aluminium Association (EAA) said that there is a need for a compensation system for the aluminium industry since, if that is not put in place, the industry is at risk (jobs etc.). He therefore asked what could be done about carbon leakage.

Felix Chr. Matthes said, concerning the debate on companies making windfall profits, we have to consider that some of the large electricity generators will, after the implementation of full auctioning from 2013 onwards, have their profits cut by some 50% (even though their profits have doubled during the last decade). He went on to say that, only with auctioning can we create the revenues we need for innovation and compensation for different industries.

 

Carl Schlyter (Greens/EFA, SE) said that utility companies have an oligopolistic domination of the markets.

Martin Hession, Chair of the CDM Executive Boardtalked about international cooperation and said specifically that:

·         Since climate change will not be solved at EU level, the Clean Development Mechanism (CDM) is important.  

·         It was significant when the EU CDM and the Kyoto CDM became inter-operational. The market for assessing CDM includes some 50 auditing companies in 14 countries, using over 200 different types of methodologies to do so.

·         Five objectives assessing CDM: greater efficiency, regional redistribution, objective clarity, enhancing transparency and promotion.

·         The outlandish argument that CDM is not verifiable is not true.

·         Assessment is a matter of judgement, especially when it comes to different projects. He also said that there is a need to focus on the quality of standards and supporting evidence.

·         Concerning environmental quality, every project has to seek stakeholder comments. The board assesses the quantity of emissions reduction and does not look at profits. HFC projects are the most additional projects in the CDM.

·         Markets need long term prices and the board thus works on a long term basis.

·         There is room for CDM reform, including improved assessment and accreditation standards.

·         The board has questioned projects in China and in other places and suspended some auditors who have not been good enough (tough decisions).

 

Rob Elsworth, Policy officer and researcher at Sandbag, told the audience that Sandbag is an NGO that focuses on offsets trading. He continued by saying that:

·         Sandbag focuses on the movements of offsets.

·         Credits from offsets are coming from industrial gas offsets (particularly from China, India and Indonesia).

·         European industries are subsidising rivalling industries abroad.

·         There is a surplus of legal credits and the ETS hence will not ‘bite’ industries until 2017.

·          To date a majority of domestic reduction has been due to recession.

·          Offsets were viewed historically as price containment, but now with the excess of credits, companies do not need to use offsets but they still do.

·          When we subsidise projects directly with CDM it raises interesting questions. It is hard to see where the CDM has driven innovation.

Pedro Martins Barata, special Climate advisor for the Ministry of Environment of Portugal, said that:

·          A carbon market is a market of choice (i.e. another system could have been chosen).

·          In international discussions there has been a call for new mechanisms.

·          CDM are project based mechanisms.

·          Sectoral CDM and sectoral trading is a cap and trade system on an international level.

·          China is not discussing linking their ETS system with anyone else.

·          Not clear that any replacement system of CDM would be better than what we have now.

·          The CDM system has been successful because it has been harnessing profits although there has been a lack of investment in CDM projects.

 

Linda McAvan (S&D, UK) mentioned that, during discussions in 2008, people were more optimistic about ETS schemes in Australia and the US but that it had all changed. She thus asked how many schemes we are likely to see in the future and  who else is involved in CDM schemes except Europe. If there is no other actor, is there then a UN system at all?

 

Lena EK (ALDE, SE) said that:

·          CDM is positive since performing good deeds in other countries is a good thing.

·          She observed that EU industry has argued for lots of CDM whereas in the US it was the complete opposite and that the difference between Member States in terms of using the mechanism is vast.

·          She was against sectoral CDM.

·          Where the different CDM projects are located (i.e. China, India and Indonesia) are three countries that should be able to pay for it themselves and so she pointed out that there are very few in poor African countries.

·          She asked why the EU cannot use the ISO standards with regards to CDM.

 

Bairbre de Brún (GUE/NGL, UK) asked if the money provided by CDM could be provided in another way.

Martin Hession said that:

·          The EU is the largest seller of CDM credits and there is demand in Japan and, to a lesser extent, in Norway and Switzerland as well.

·          CDM offers cheap abatement, employment and good investments.

·          Said that the market principle is better at finding solutions than any other.

Rob Elsworth said that:

·          CDM is being used to develop projects in other countries.

·          He did not think it was a good investment for Europe.

·          The EU should look at where the money goes.

·          Some projects are not promoting sustainable investment.

·          We are subsidising competitors whilst at the same time being accused of carbon leakage.

·          There is a great value in offsets but we should focus on what we want to focus on.

Pedro Martins Barata said that:

·          In terms of what CDM has achieved so far, there has been real, but quite vague, benefits.

·          CDM has provided liquidity.

·          He liked that industrial gas offsets have been eliminated and that the reason why the situation in the EU is different from the US is because the US does not care about the international system whereas the EU does (in the US, CDM is viewed as ‘ChinaDM’).

·          EU legislation has made actors move into Africa.

·          The reason why ISO standards are not being used is because CDM is its own standard. 

 

The Commission representative said that:

·          In both China and Korea they are planning to have an ETS.

·          India has its own ETS, which is going live later this month.

·          The EU recently started linking its ETS with Lichtenstein, Norway and Switzerland – thus it is spreading.

·          From 2013 onwards, existing CDM projects in countries like China and India will not be able to have new projects subsidised by the EU (except for in the least developed countries).

·          CDM has been useful in awareness raising but more needs to be done.

·           A lot of CDM in Africa.

A CDM Watch representative asked what the chances of seeing a ban on HFC23 were.

A journalist asked what the tangible results of CDM have been. Why is it all going to China, he asked.

Martin Hession said that global emissions have fallen by 50% thanks to CDM. The reason why the projects are in china is because it has a large population and is a fast growing market.

 

The Commission representative said that the EU is doing what it can to provide clarity and that we need sectoral crediting in addition to the CDM.