Recent studies and reports have recommended carbon pricing as an innovative finance source because it offers dual benefits: it provides incentives for mitigation and it helps raise revenues for climate actions. It can be implemented through a carbon tax or fee by setting a fixed price or through emissions trading by setting a fixed climate target and allowing the market to set the price (AGF 2010, World Bank 2011).
With the establishment of the EU ETS, the EU has already implemented carbon pricing – as recommended by AGF and World Bank. The EU ETS the largest cap-and-trade system worldwide; however, it has become entirely ineffective with regard to reducing emissions and generating revenues.
In a fixed EU ETS system, revenues generated by auctioning the emission allowances under the EU ETS could be considered as the largest – and most promising – innovative financing source within the European Union. If the right framework conditions were pro-vided (mainly a linear factor sufficient to meet the agreed long term targets), these auc-tioning revenues could potentially deliver revenues of more than 20 billion EUR per year by 2020 (EC 2011).
However, without the implementation of an ambitious European climate policy the EU ETS is losing its impact as an instrument for reducing emissions and for generating reve-nues.2
2.2.1 The use of the EU ETS revenues: The recommendation of the EU ETS directive as a compromise
In 2008, the question of whether or not the EU ETS revenues should be used (respec-tively earmarked) for funding climate action was intensively discussed among EU deci-sion-makers3. The environment committee of the European Parliament wanted the EU ETS revenues to solely finance climate-related measures, with at least 50 % (only 20 % was suggested by the Commission) of the revenues provided for climate financing in developing countries and the remainder used to fund climate-related projects within the EU (Müller 2008).
In the end, a binding arrangement for the use of the EU ETS revenues could not be agreed upon. The European Council declaration states that:
“Member States will determine, in accordance with their respective constitutional and budgetary requirements, the use of revenues generated from the auctioning of allowances in the EU emissions trading system. It takes note of their willingness to use at least half of this amount for actions to reduce greenhouse gas emissions
…” (EU council 2008).
2If the back-loading approach is sufficient for stabilisation. the certificate price will be briefly discussed in section 2.2.3
3The EU Commission and the Parliament supported this approach, but some of the new EU Member States opposed it.
This non-binding nature in terms of using the EU ETS revenues is also reflected in the EU ETS directive which recommends that at least 50 % should be used for climate action.
The EU directive mentions a variety of different possible uses for ETS revenues – mainly for domestic climate but also international climate financing (EU directive 2009/29/EC).4 Also the “willingness” of member states “to use at least half of this amount for actions to reduce greenhouse gas emissions” is a good basis for action within the Parliament or from civil society.
2.2.2 The EU ETS and its recent problems: Need for reparation to increase the certificate price
As mentioned above, the EU ETS is currently unable to unlock its twin potential. The volatility and break down of the certificate price is clearly hampering the possibility of EU ETS becoming an innovative source of finance. Although the EU predicted a price of 40 EUR per t/CO2 when the EU ETS was created, the price is currently less than 4 EUR per t/CO2 (EC 2008).
Several factors influence the certificate price; however, the recent economic crisis within the European Union and the use of external emission reduction credits from Clean Devel-opment Mechanism and Joint Implementation are the main factors for the price decline.
Hence, a surplus of emission allowances on the market has lowered the certificate price (WWF 2012). To counter this effect, a new binding European reduction target for green-house gas emissions is urgently needed, with an EU emission reduction target for 2020 strengthened to 30 % (compared to 1990) instead of the current 20 % and an ambitious emission target for 2030 (55 %) on a cost efficient path towards 2050 targets (80-95 %).The linear factor has to be increased in line with those targets. The so called back-loading approach can only be a first step towards such a structural reform. Back-back-loading would temporarily reduce the volume of emission allowances by postponing 900 million allowances from 2013 – 2015 to the end of the third emission trading period in 2020 (EC 2012). Even though the environment committee of the European Parliament supported the back-loading measure, the European Parliament itself did not support it in mid-April 2013. However, the proposal will go back to the Environment Committee for further con-sideration. A decision is expected by June 2013 (EU Parliament 2013) or early July.
However the situation is difficult, mainly because the German Government declines to send a supportive signal. Table 1 shows how the different approaches influence the ETS revenues per EU Member State.
4 ETS-Directive 2009/29/EC, Article 10 states: “Member States shall determine the use of revenues generated from the auctioning of allowances. At least 50 % of the revenues generated from the auctioning of allowances […] should be used for one or more of the following: (a) to reduce greenhouse gas emissions, including by contributing to the Global Energy Efficiency and Renewable Energy Fund and to the Adaptation Fund [..], (b) to develop renewable energies [...](c) measures to avoid deforestation […] (d) forestry sequestration in the Community; (e) the environmentally safe capture and geological storage of CO2, in particular from solid fossil fuel power stations; (f) to encourage a shift to low-emission and public forms of transport; (g) to fi-nance research and development in energy efficiency and clean technologies in the sectors covered by this Directive; (h) measures intended to increase energy efficiency and insulation or to provide financial support […] (i) to cover administrative expenses of the management of the Community scheme.”
Table 1: Auctioning revenues per Member State according to different scenarios (WWF 2012)5
5 The reference scenario is based on an average certificate price of 10.25 EUR, the back-loading approach is based on the scenario that 1.2 billion EURs will be postponed by 5 years (see WWF 2012). At the moment it can be assumed that, without back-loading, the average certificate price will be 5 EUR during the 3rd EU ETS period, meaning only half of the reference scenario amount will be achieved within the 3rd EU ETS period.