The EU’s carbon market is currently suffering from an oversupply of carbon credits, which dropped in price from 30 Euros in 2008 to just 4 Euros today. Designed to incentivize industries to shift to low-emission operations, the scheme is failing to achieve emissions reductions because of these devalued carbon credits. Furthermore, while the scheme was considered as the quickest means of generating climate funds, of all participating countries only Germany has since pledged 1.8 billion Euros to the UN Green Climate Fund. Furthermore, German funding may be at risk since pledges were based on a carbon pricing of 10 Euros, which has since dropped. Repeated problems with the EU’s market-based scheme highlight the need for international support to reach an agreement on reducing carbon emissions through polluter taxes and removal of fossil fuel subsidies.
By Andrew Allan
Failure by the EU to fix its carbon market could further derail a plan to help poor countries fight climate change, as low CO2 prices cut revenue from EU government permit sales while deterring other nations from launching similar markets, U.N. negotiators and observers said.
This year, delegates from more than 190 nations will meet at least four times to discuss how to scale up climate finance from current levels of about $10 billion annually to meet a 2009 pledge to provide $100 billion a year by the end of the decade.
A World Bank report published in 2011 suggested at least a quarter of the money could be raised by charging big energy users in rich countries for each tonne of carbon dioxide they emit under an emissions trading scheme.
But observers said other means may have to be found if the EU cannot rescue its carbon market from a huge oversupply of carbon permits, which has caused CO2 permit prices to crash to around 4 euros from over 30 euros in 2008.
“In Europe the carbon price is a reflection of the state of ambition to cut emissions. We are worried about where finance will come from if not from here,” said Seyni Nafo, who negotiates U.N. climate pacts on behalf of the Africa Group, which represents around 50 nations.
Developing countries and campaign groups said the money is urgently needed to help countries combat the worst effects of a warmer planet, such as floods, drought and increased food prices.
GERMANY
To help raise funds, EU law states all European nations should allocate half of all proceeds raised from selling carbon permits towards combating climate change, but so far Germany is the only country to have earmarked revenues.
Europe’s biggest emitter has already pledged 1.8 billion euros in climate finance per year for the next two years, and plans this year to make additional pledges of 1.23 billion euros for the 2014-2021 period, mostly through the U.N. Green Climate Fund.
But the fate of that pledge, which is contained in the nation’s climate and energy budget and would likely be topped up on an annual basis, has been thrown into doubt as it is based indirectly on an EU carbon price of 10 euros, two-and-a-half times current levels.
Jan Kowalzig, a campaigner with charity Oxfam who has studied the figures, said: “If the roughly 1.23 billion-euro budget authorisation gets cut then Germany can make less bilateral commitments this year than those originally planned and would also not be able to pledge as much money to the Green Climate Fund as previously planned.”
No-one was available for comment from the German ministry of economy.
POLAND
United Nations envoys will meet in Warsaw, Poland in November, with pressure likely to fall on the world’s richest nations to finally outline strategies on how to raise the money.
Removing fossil fuel subsidies, a financial transaction tax and a levy on planes and ships are some of the options that have been discussed in the past, but campaigners said these may take years to agree and that directing funds from carbon markets remains the quickest way to raise cash.
The World Bank’s predictions are based on a $25-per-unit carbon price in all rich nations, but outside of Europe very few nations plan to launch national cap-and-trade schemes.
A failure by the EU market to wean its energy system off fossil fuels is unlikely to persuade them, according to Alexander Sarac, a lawyer with DLA Piper who advises the Georgian government at U.N. climate talks.
“If politicians fail to mobilize support (for the EU market), it will get more and more difficult for other nations to launch similar schemes if Europe fails to fix its own,” he said.
“The key words in Warsaw this year will be ‘funding gap’. There is no public money available and there is no real pressure from the public on governments to deliver it. Without carbon markets, the money doesn’t come automatically,” he added.
Kowalzig agreed, adding that without agreement to temporarily curb supply, hopes for wider structural reform would be dashed.
“The EU has constantly used emissions trading as the main climate policy instrument to show how you can reduce emissions and sustain economic growth,” he added.
“If they fail to underpin that claim, that causes huge damage to carbon trading and will cause other countries to think ‘If you can’t do it, then we don’t have the confidence that we can do it.’”
