European Utilities: The EU emissions trading scheme will fail to deliver

Table of Contents

• DATAMONITOR VIEW
  • PREDICTION
  • EU emissions trading fails to incentivise carbon abatement, leaving a void of uncertainty in Europe's energy sector.
  • SUMMARY
  • An over allocation of emissions credits in the first phase subdues the price of carbon below the necessary levels to promote genuine carbon abatement investment. A lack of policy cohesion consistently undermines Europe's attempt to get the second phase back on track and the EU collectively misses its Kyoto targets.
  • METHODOLOGY
• ANALYSIS
  • Europe pins hopes on a market-based mechanism to tackle climate change
  • EU Directive is not uniformly transposed into national law
  • National Allocation Plans are overly generous in first phase
  • Traded carbon prices are not expensive enough to incentivise fuel switching
  • Brussels fails to establish necessary second phase quota cuts
  • Germany wants to exempt new plant builds from emissions curbs
  • Price signals do not promote long-term abatement investment
  • Coal generators will benefit the most from ETS failure
  • Global emissions trading scheme hampered by Europe's failed attempt
  • European emissions trading limps on, while focus shifts back to national policy instruments
• APPENDIX
  • Further reading
  • Ask the analyst
  • List of Figures
    • Figure 1: Emission credit surplus (or deficit), 2005
    • Figure 2: Fuel switching margins: coal versus gas-fired plant
    • Figure 3: Projected distance to achieving second phase targets (%)
    • Figure 4: UK example: expensive gas and electricity versus cheap coal and carbon
    • Figure 5: In a low coal price/low carbon price climate, emissions trading fails to promote fuel switching away from fossil fuel generation and the scheme collapses. Credits are annulled and wholesale power prices fall back towards the original costs of production