New study: no hit to profits from EU carbon scheme
07 December 2018 | Trading
Warnings that the EU's emissions trading system (ETS) would harm Europe's economic competitiveness have been proven to be exaggerated, according to a new paper published on Thursday (6 December) by the Organisation for Economic Co-operation and Development (OECD).
The authors wrote that between 2005 and 2012 the ETS led to a 10 percent reduction of greenhouse gas emissions, "but had no negative impact on the economic performance of regulated firms".
"These results demonstrate that concerns that the EU ETS would come at a cost in terms of competitiveness have been vastly overplayed," said the researchers, Antoine Dechezlepretre, Daniel Nachtigall and Frank Venmans, whose study did not represent an official view of the OECD.
The ETS is the EU's main climate action tool, aimed at enticing 8,000 of Europe's most polluting companies to reduce emissions by becoming more efficient or switching to a cleaner power source.
Companies owning installations covered by the ETS, like steel-production plants or coal-fired power plants, are required to annually hand in ETS certificates – or carbon credits – for every tonne of CO2 emitted.
The credits can be sold and bought, but each year less of them become available on the market, making them (at least in theory), more expensive as time goes on.
The system has several exemptions, and offers free credits to some companies to accommodate fears - notably from eastern EU member states - that the ETS will make their firms uncompetitive, by being undercut by competitors from outside the EU not covered by the ETS.
But the three OECD researchers found the opposite.
"Turning to the impact on the economic performance of regulated firms, we find that, contrary to what could have been expected, the EU ETS led to a statistically significant increase in revenue and in fixed assets of regulated firms," they wrote.
"At the same time, the EU ETS has not had any statistically significant impact on regulated firms' numbers of employees and profit," the report noted.
"These findings suggest that the EU ETS induced regulated companies to increase investment likely in carbon-saving technologies which, in turn, may have increased productivity," it added.
These findings contradict the line usually taken by Poland and other eastern EU countries in negotiations on the ETS, that the system should be not applied too strictly, to prevent "weaker competitiveness".
Glut of CO2 credits
The report comes as the world's climate negotiators meet in the Polish city Katowice for the annual UN summit on climate change.
It also comes just weeks before the ETS will experience the most significant change in several years.
As of 1 January 2019, there will be a market mechanism called the 'market stability reserve' which will take millions of carbon credits off the market if there are too many of them.
The mechanism will address a design flaw in the system, which was that the number of credits put to auction was determined long in advance, without taking into account any surplus created by reduced demand.
During the economic crisis that started around a decade ago, industrial production dropped in Europe, thereby reducing the need for carbon credits – in turn leading to a glut in the market.
This has led to years during which polluting was cheap.
Experts consider that an ETS price of around €30 per tonne CO2 is needed to change companies' emissions behaviour, it had been less than €10 for years until the beginning of 2018.
Since then however, the ETS price has been steadily increasing – likely because companies and traders know that the ETS credits will become more scarce as of 1 January 2019.
Since the end of August, the price has fluctuated between €15 and €25 per tonne CO2.