Apr 17 2016

Who wants it? Is a funding programme created from the monetisation of carbon allowances a good idea in principle?

This article is written from the published responses to the European Commission consultation on revision of the EU Emission Trading System (EU ETS) Directive, which closed on 16 March 2015.

CEPI + 2 explain the situation: “The NER300 program was funded from the sale of 300 million emission allowances from the New Entrants’ Reserve, designed to support new investments in industry, to support research programs focused on renewable energy and carbon capture and storage. As such, it represented a financial transfer from the European industry to the energy sector.” The EC, with the backing of the European Council and European Parliament, wants to broaden NER300 out to industry, yet industry continues to view NER400 with more suspicion than the power sector. The hardest line is taken by Glass for Europe: “the innovation fund should be funded by auctioning revenues and not by the diversion or use of any sort of potentially tradable allowances.” The association (but not its members) added this line: “We consider the financing scheme and the increase in the initial endowment from 300 to 400 million allowances not appropriate.” Why the hostility? Say companies in the non-ferrous metal sector among several others, “Firstly, the availability of funds will be linked to the price of emission allowances (EUAs) and thus will be very volatile, depending on the success of the EU’s climate policy. Secondly, the need for co-financing of such projects depends on the competitive position of low-carbon energy in the market, which is mainly linked to the cost of carbon emissions.”

Shell is anxious not to create redundancy in the EU’s instruments, and for the welfare of industry: “[ETS Innovation Fund should] not replace other existing or future support mechanisms at EU or MS level. The fund should continue to use allowances under the existing cap. The fund should also avoid any impact to the level of free allocation for those on the current carbon leakage list.” (For alternative points of view, see ‘Baby snatching’ on the question of coherence with existing instruments, and the statements of some Member States here and associations here on the question of carbon leakage).

Twenty-one organisations, many from the materials sector and chambers of commerce, say that while “the ETS directive states that half of auctioning revenues should be spent on decarbonisation measures, this has not been the case so far.” BP believes it has economic theory on its side when it says that even this would have been too much. “BP’s preference for EU ETS revenues is that they should be returned to the economy in a non-distortionary manner, e.g. via corporation and income tax reductions.”

Cembureau can say…

“There is a strong argument that with the high carbon prices that MSR [Market Stability Reserve] will generate that power generation does not need a high level of innovation funding and could justify investments using the higher EUA price and their ability to pass on the full EUA cost.”

… but the new reality, accepted by many more today than before the European Council Conclusions of October 2014 (see the responses to the ETS consultation of 2014 on post-2020 carbon leakage provisions), is that ETS Innovation Fund is on its way. Its arrival is greeted with a tone of heavy resignation by GSV

“The steel industry does not in principle support the removal of ETS allowances from the wider market […], but if allowances are to be removed it is vital that there is fair access to innovation funding for all sectors impacted by the EU ETS.”

…and cheerfully by Austrian Federal Economic Chamber — Wirtschaftskammer Österreich (WKÖ)…

“We explicitly welcome the creation of the innovation fund, especially the extended scope to include low-carbon innovation in industrial sectors!”