By Kayleigh Lewis - 28th January 2013
The European emission trading scheme is at the crossroads and it is up to politicians to restore confidence and choose the future direction
Parliament's industry research and energy (ITRE) committee has rejected a scheme which would allow the 'backloading' of carbon allowances.
It was hoped that postponing the auction of 900 million allowances from 2013-2015 until 2019-2020, when the markets are expected to pick up, would rebalance supply and demand.
However, the committee rejected the proposal which had an immediate effect on the carbon market as prices fell to their lowest ever, at just €2.8 per tonne, following Thursday's vote.
As a result, the future of the emissions trading scheme (ETS) has been called into doubt, with Greens deputy Bas Eickhout saying that it is facing an "existential crisis".
"The European emission trading scheme is at the crossroads and it is up to politicians to restore confidence and choose the future direction," he said.
"Either we throw our carbon market a life vest by showing investors that we are serious about letting polluters pay for their CO2 emissions, or we let things be: the surplus of some two billion carbon permits smothers the system, the total loss of confidence scares the few remaining buyers and investors away, carbon prices drop to close to zero and the carbon market collapses completely.
The EU's ETS is one of the commission's key tools for combating climate change and reducing greenhouse gases, covering 45 per cent of the total greenhouse gas emissions from the 27 member states, and is the worlds biggest emissions trading scheme, which accounts for 75 per cent of international carbon trading.
Since the markets launch in 2005, it has faced numerous difficulties, such as an over-allocation of carbon permits, giving polluters windfall profits, and a struggling economy.
According to the commission, if the imbalances in the market remain unaddressed then the ETS will struggle to meet demanding emission reduction targets in a cost-effective manner.
Speaking in the parliament's environment, public health and food safety (ENVI) committee following the ITRE vote, Finnish MEP Eija-Riitta Korhola said, "What we need is long term predictability in the legislation…backloading will not help."
"ETS should be left to function without this kind of intervention. ETS should be a technology neutral market-based instrument promoting the reduction of emissions in a both effective and energy efficient manner while giving the industry certainty and predictability."
Romana Jordan, a member of the ITRE committee, said, "The emissions trading scheme is delivering on its main objectives, namely to reduce industrial carbon emissions by 21 per cent in 2020."
However, she added, "Interfering in a market system with the intention of creating public incentives while increasing costs for industry and SMEs would send the wrong signal in times of economic slow down."
UK Greens MEP Jean Lambert also agreed that backloading is not the solution, saying, "The trouble with postponing any new pollution permits, rather than scrapping them entirely, is that they'll have to come back later.
"That would be like pouring water back into an already overflowing bathtub."
But climate action commissioner Connie Hedegaard said, "This is not the time to put the commission's backloading proposal on the backburner.
"Few would disagree that the ETS, a market based cap and trade system, is the most cost-efficient tool in EU climate politics."
She added that the "alternative to a well-functioning carbon market" is not that EU member states will make polluting free.
"On a day where the carbon price at some point went below €3 it must be clear to all that when the commission warned that the ETS price could drop dramatically it was not a false warning but a real possibility."
ENVI committee member Peter Liese agreed that the price drop was not "out of the blue", however he said that the problem was so serious due to an "over-allocation of permits".
Liese also said that the industries which have received an over-allocation of carbon permits have benefited from it, adding that change should have been proposed sooner to prevent the current situation from ever happening.