In April of the year, the EU adopted reforms and new targets for its Emissions Trading Scheme (ETS) to expand the scope of the market-based program that is central to the EU’s decarbonization strategy and update targets aimed at achieving 62% reductions in carbon emissions by 2030. VX presents this timely point/counterpoint on emissions trading as a ‘tool in the toolbox’ for incentivizing carbon emissions reduction. First, we share a critique of the EU decision by Hans-Josef Fell, former German Bundestag member from 1998-2013 and co-author of Germany’s Renewable Energy Sources Act, followed by a response from former CARB Chair Mary Nichols — who played a key role in crafting California’s Cap & Trade system. Nichols' POV contrasts with the EU. Mary emphasizes both that California’s Cap & Trade regime has raised billions in state revenue in California for local community-based emissions reduction efforts and has been an effective market signal to drive investment in lower carbon technologies and processes.
EU Decides on Comprehensive Emissions Trading - Goodbye Climate Protection!
By Hans-Joseph Fell
Recently, there was the agreement at the EU level for the expansion of the European Emissions Trading Scheme (ETS).
Much praised from the Social Democrats, Liberals and Conservatives to the Greens in the EU Parliament, the agreement is celebrated as a breakthrough for climate protection.
Emissions Trading has not Brought Climate Protection
Emissions trading is regarded worldwide as the most important instrument for climate protection.
In reality, however, it has achieved next to nothing.
Nevertheless - or rather because of this? - it is expanding beyond Europe to China, Mexico, some U.S. states, Canada and New Zealand, among others.
Since the introduction of EU emissions trading in 2005, emissions have fallen by about 36 percent in the EU and about 31 percent in Germany by 2021. This is what many proponents of the ETS argue.
But emissions trading is not the cause of this. So far, this has largely been applied in the power sector, where the expansion of renewables is the all-important reason for the reduction in CO2 emissions. The main thing that has reduced emissions has been legislation for feed-in tariffs - such as the German EEG. Not a single renewable energy plant has ever been financed with the help of emissions trading. Not a single bank finances renewable energy projects on the basis of emissions trading, because - unlike a legally regulated feed-in tariff - it offers no direct refinancing income. There can therefore be no question of emissions trading having any appreciable effect in the electricity sector.
Renewable energies have been financed mainly with feed-in tariff subsidies and, more recently, privately with direct marketing (PPAs) even without subsidies. This was made possible by the success of the Renewable Energy Sources Act (EEG), which has drastically reduced investment costs over the past 20 years. Emissions trading also played no role in this.
Emissions Trading is Supposed to Drive Up Energy Prices - Which are then Subsidized Back Down Again
The basic principle of emissions trading is that emissions trading prices should be so high that people will turn to lower-emission alternatives in the market. In the energy sector, therefore, the prices for oil, natural gas and coal should be so high that renewable energies become even more profitable.
Emissions trading could only be effective if emissions trading prices were actually so high that they corresponded to the polluter costs. According to the Federal Environment Agency (UBA), these should have been around €237 per ton of carbon dioxide in 2022.
However, the emissions trading price in 2022 never exceeded €100 per ton of CO2.
The current agreement on emissions trading will bring a moderate price increase for consumers of fossil energy.
Calculations of Verivox result for the recent agreement of the European Union emission trade exemplarily: A pair, which uses in the year on the average 12,000 kilowatt hours natural gas, pays in 2023 €86 e more, in the next year €100, 2025 finally €129 and 2026 between €158 and €187.
Because of these moderate price increases, hardly anyone will switch to heating with renewable energies. CO2 emissions will therefore continue to rise, and emissions trading will again fizzle out ineffectively.
Should the energy price increase nevertheless be high for many, i.e. show its desired climate effect, then according to EU Commissioner Frans Timmermans it is planned to pay a compensation for the high energy bills with tax money.
This makes the whole absurdity of EU emissions trading obvious: as CO2 prices rise, so should energy prices. But if these energy prices rise, there are supposed to be social cushions, i.e. for most people the energy price will then hardly rise ... Where is the effect of emissions trading then?
Last year, we saw exactly how politicians act:
When oil and natural gas prices rose due to shortages on the world markets - especially as a result of the war in Ukraine - suddenly there were fuel discounts and heating subsidies for everyone, regardless of social need.
The High Fossil Energy Prices In 2022 Actually Led To Strong Savings
In 2022, if the effect of high natural gas and oil prices hoped for in terms of climate protection had occurred; there would have been no need for a higher emissions trading price at all.
And in fact, there was an enormous savings effect on natural gas in 2022: According to a recent study by the Centre for Sustainability at the Hertie School, the savings targets issued by the German government and the EU Commission were actually significantly exceeded. Natural gas consumption fell by around 25 percent between September and December 2022 compared with the previous year. The authors of the study emphasize that this happened because of high natural gas prices.
But the savings could probably have been even higher, and the climate impact therefore greater, if taxpayers' money had not been used to lower heating and fuel bills again for consumers - for everyone, mind you, not just those in need.
This is exactly what Timmermans wants to happen again in emissions trading when energy prices rise as a result of higher emissions certificate prices.
Don't the EU politicians, EU officials, EU governments and their scientific advisors realize how absurd their decisions are?
They decide on higher CO2 prices for climate protection, and as soon as energy prices logically rise, they again decide on tax breaks for energy prices. The effect: climate protection falls by the wayside.
Extension to Buildings and Transport Will Not Bring Climate Protection - Industry Still Largely Exempt
In addition, the EU level has agreed that EU emissions trading should also be extended to buildings and transport.
In the industrial sector, the ineffectiveness was agreed at the same time, because industry is to continue to receive free certificates until 2034. So, climate protection only after 2034?
The extension to the transport sector will not have any climate protection effect either, as has been seen in Germany for two years now.
Emissions trading in the transport sector was introduced under Chancellor Merkel. Currently, all the newspapers are full of reports that the transport sector is not making any contribution to climate protection, which is why Transport Minister Volker Wissing is under massive pressure.
How so? I thought there was emissions trading in the transport sector! It was supposed to bring climate protection to the transport sector!
So it's clear, especially in Germany, that emissions trading in the transport sector is a complete failure.
The fact that it cannot work, I had already described on the basis of my emission trade premiums of €300 euros each for my two E-mobiles. These were no incentive at all for me (and probably all other e-car buyers) to buy an e-car. Rather, this bonus is an incentive for all those who want to continue emitting CO2 to pay this bonus to me and other e-car drivers.
It is incomprehensible why the negotiators in the EU Parliament, all the scientists who do the studies for it, the EU Commission and the EU governments do not realize that emissions trading is nothing but a swindle.
It is simply a comprehensive permission for the climate destroyers to continue emitting CO2. They obviously only pay extensively out of petty cash for their emissions instead of finally stopping them.
Even climate researchers have not understood this. Just Ottmar Edenhofer of the climate research institute Potsdam praised the emission trade in highest tones on the CDU climate protection congress.
I had already had several discussions with Edenhofer around 2000 about the ineffectiveness of emissions trading compared to the effectiveness of the EEG. Even then, he could not or would not follow my arguments. But the fact that he still does not recognize that the EEG - in contrast to emissions trading - has achieved climate effectiveness and emissions trading has not, at least raises doubts about his ability to analyze ...
Emissions Trading Only Serves the Climate-Damaging Fossil Business Interests and the Heating of the Earth Continues
Today after more than 2 decades of ineffectiveness of emissions trading it has become clear:
Whoever is looking for a justification for this unreasonableness of the EU institutions to now introduce comprehensive emissions trading, will quickly find it: Emissions trading is not there to organize climate protection, but to allow the fossil economy to continue to do business in the sectors of electricity, heating, transport and industry.
Hermann Scheer and I were already aware of this in the year 2000: emissions trading is nothing more than the deception of the fossil economy to do climate protection, in reality it is only about continuing their fossil business.
That is why we did not agree to the introduction of national emissions trading in the Bundestag in 2000.
But the red-green majority under Environment Minister Jürgen Trittin saw things differently at the time, and so we still have emissions trading but no climate protection.
For reasons of protection of fossil business interests, the ineffective instrument of emissions trading is still being propagated as the most effective instrument for climate protection and its expansion in the EU and worldwide is still being decided.
Thus, the world community is racing ever faster towards an earth heated up by 3°C, in which there will no longer be any human civilization as there is today.
Former CARB Chair Mary Nichols Responds: California’s Cap & Trade is an Effective Market Signal
I have now read the piece by Hans-Josef Fell three times, and I am still not sure exactly what his beef is. But since the word “trading” seems to be a dog-whistle for some environmental activists, let me respond briefly from the perspective of a state that has led on climate policy, including the first economy-wide cap and trade program.
When California embarked in 2008 on its first Scoping Plan designed to achieve the then-current goal of reducing greenhouse gas emissions to 1990 levels by 2020, we included as one element of that plan at cap-and-trade regulation for the largest stationary emitters within the state, plus entities that sold electricity into the California market, as well as suppliers of motor vehicle fuels.
The goal of the program was to reduce emissions using a legally binding cap; covered entities were required to hold allowances issued by the state; trading under the cap was permitted but offsets created by third-parties were only allowed as a small percentage of any entity’s compliance obligation. The regulation is highly detailed and contains measures including independent verification of the emissions data by certified auditors.
The California cap and trade program has been criticized for not being sufficiently ambitious: it was designed to achieve under 20% of the total reductions needed to meet the 2020 legislative target. The biggest contributor to reductions is the state’s vehicle emissions limits, including the mandate for increasing numbers of zero emissions vehicles, followed by ambitious requirements for renewable electricity. Nonetheless, cap and trade played its part in California reaching its 2020 goal ahead of schedule, while raising billions of dollars from the auctioning of state allowances.
The revenues from the greenhouse gas reductions fund have been appropriated by the Legislature for a variety of programs designed to achieve additional greenhouse gas reductions, while achieving other public benefits, mostly by grants focused on low-income communities with high concentrations of unhealthy air pollution.
The trading feature of the program, as with others Fell disparages, never did much on its own. It was never meant to raise prices to levels that would cause pain on consumers, but only to relieve pressure on firms that were required to hold allowances or curtail operations. While the allowance price rose slowly, it was enough to send a clear signal to businesses that they should be investing in lower carbon technologies and processes. And it has done so without any of the price manipulations and hoarding scandals that have caused legitimate distrust of environmental markets.
Now that we are facing much more ambitious emissions reductions challenges, CARB has launched a review of the existing cap-and-trade program. Allowances that come closer to the true social cost of carbon are certainly on the table. One thing we can be quite sure of is that any new or revised emissions trading will only be allowed under a binding regulatory cap, and that there will be a vigorous public debate among all stakeholders about the role of this program in California’s large portfolio of emissions reduction programs.