Fans of European emissions trading and renewable energy (RE) sceptics alike occasionally bring forth an argument, which asks for a riposte on behalf of the Climate Concept Foundation.
In the following paragraphs, we will discuss this assumption:
„Within the applicability of the European Union’s Emission Trading Scheme (EU ETS), a reinforcement of RE-capacity will not result in additional cuts in CO2-emissions. Whereas a substitution of fossil-fuel-based energy production by RE does reduce emissions, this also frees a corresponding amount of EU Allowances, which will be used within the system to justify further emissions. It is a zero-sum-game.”
At first glance, this assumption is correct. The amount of Allowances made available within the EU ETS is clearly specified. The amount defines the reduction path, which European Union legislators envisaged for the industrial sectors covered by the EU ETS. And all Allowances given out will at some stage be used by one or the other plant operator; no Allowance will forfeit due to not being put to use (other than those held by the Climate Concept Foundation).
Does this mean that there is no point in installing a rooftop PV system on one’s house in Hamburg? Is an investment – triggered not only by financial aims, but also promoted by the wish to do the right thing ecologically – into a wind-power-fund that constructs wind power plants within the EU therefore without effect?
Are such activities not even helping operators of our fossil-fuel-based energy infrastructure? Do they no delay the transformation we need to see by reducing demand for emission certificates, thus deflating their price level and thereby lessening the incentive to reduce emissions?
There is no simple answers to this. Because in case of significant surplus amounts of certificates, the so called Market Stability Reserve (MSR) built into the EU ETS entails that a part of the newly distributed certificates is permanently withheld from the carbon market. In case too many certificates are out there, the issuance of new ones is diminished.
Because augmenting RE-capacity could lead to a higher surplus in certificates, there is likely to be a reduced issuance of new certificates induced by the additional capacity. However, this effect could only address a part of the surplus: only 24% of the surplus can be deleted, the remaining 76% remain available to the market without correction and would thus lead to additional emissions.
In our view, reinforcing RE-capacity gains nevertheless is far from pointless. In fact, the increasing levels of investments in RE-capacities is a consequence of EU climate policy, especially of the EU ETS.
Emissions Trading causes additional costs to fossil-fuel-based energy production and thereby raises the competitive edge and attractiveness of REs. If there were no such thing as the EU ETS, investments into RE-capacity would arguably have been lower over the last years. Also presently, there is a boom in the construction of RE which is likely, amongst other factors, due to the – compared to previous years – high carbon prices within the EU ETS.
All this does not refute the argument in question here, however it does show that its perspective is short sighted: If Emissions Trading causes the desired effect, this does not render an adding of RE-capacity pointless. Maybe, the addition of RE-capacity does not entail additional emission reductions – i.e. exceeding the set cap – however, it does in absolute terms, reduce the atmosphere’s saturation with CO2 and the CO2intensity of European energy production.
Beyond the scope of the question raised here, the addition of RE-capacity brings about further advantages:
It reduces the emission of other harmful substances like quicksilver, micro particles, nitric and sulphuric oxides resulting from lower usage rates of fossil fuels (or hazardous waste in case abatement technology is applied).
In addition, the dependence on energy imports is being lowered.
And last, but not least the factual implementation of emission reductions helps keeping carbon prices in check. This makes European Climate Policy more easily acceptable, in the mid-term this provides leeway for further increasing the ambition level of climate policy measures as long as economy and society can cope well with the level of carbon pricing.
The points raised towards the end of this post do provide further food for thought. Stay tuned, dear reader!
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