Europe alone on emissions trading

The IPCC is meeting in Stockholm in a much-changed political climate compared with its last such gathering in 2007. Then, before the onset of the economic crisis, there was an expectation that a binding emissions-reduction deal could be reached in Copenhagen in 2009. Politicians from left and right were gushing over the potential for a market mechanism to solve the climate crisis through global emissions-trading schemes (ETS).

Six years on, such optimism has long since evaporated. Economic woes have crowded climate concerns out of the public consciousness, and emissions-reduction schemes have stalled after the collapse of the Copenhagen talks. Perhaps most damagingly, the market approach that everyone was so excited about is in serious trouble.

Earlier this month, Australians voted out the governing Labour Party. One of the biggest campaign issues was the carbon price and emissions-trading scheme set up by Labour. Tony Abbott, the conservative challenger, promised to abolish it. Now that he has been elected, he says doing so will be one of his first acts as prime minister. He will replace it with a climate fund worth 2.9billion Australian dollars.

This leaves the European Union in a very tough spot. So far, Australia is the only country outside the Union to have created a national emissions-trading scheme. When plans were made last year to link the EU and Australian ETS systems, the Commission proclaimed the agreement as the proof that the world at large is still embracing carbon-trading. Now – though some regional schemes are being developed in China, California, New Zealand and South Korea – there is no other sizeable national system in the world to link to the ETS.

This is not how it was supposed to be. When the EU developed

its ETS, the idea was for it to be part of a global trading system eventually. It was the United States that pushed for the EU to adopt a market mechanism, though Europeans were sceptical about the idea. But in 2010 plans for a US ETS were dealt a possibly fatal blow by the US Congress after massive gains by the climate-sceptic Tea Party in mid-term elections. There is now little prospect of the US adopting an ETS, and the EU has been left holding the baby.

The bad news from Australia is just the latest blow in an annus horribilis for the EU ETS. As the price of allowances in the carbon market continues to fall to almost nothing thanks to an over- allocation of free allowances, European politicians have repeatedly shown an unwillingness to come to the rescue.

MEPs rejected a temporary measure to fix the price problem in May, and member states refused to intervene until after the German elections.

Member states have been just as reticent to defend the ETS from foreign attack. As global giants like the US and China threatened a trade war in response to the inclusion of foreign airlines in the EU’s ETS, national capitals and European aircraft manufacturer Airbus have quietly urged the European Commission to throw in the towel. The Commission did just that this summer when, as part of the negotiations led by the International Civil Aviation Organization it offered to exclude any portion of flights outside EU airspace.

The Commission is to put forward a proposal by the end of the year for structural reforms of the ETS to solve the low-price problem, and it hopes this can be passed before the end of the current European Parliament’s mandate. But, given global developments over the past three years, many policy-makers are not exactly in the mood to fix the ailing system.

Even a dire warning from the IPCC this week will not do much to change this equation. European policy-makers may still believe in the seriousness of the problem, but they are starting to doubt the effectiveness of the solution.