Silver or grey linings?

Back in January, Due South commented on one silver lining of the economic crisis – a fall in CO2 emissions. With a double-dip recession predicted by some, could this be a double windfall for efforts to combat climate change?

Annual global emissions fell by 1.1 per cent to 31.13 billion tonnes in 2009 – down from a record 31.55 billion tonnes in 2008. This trend has been even more marked in the UK, where net emissions of carbon dioxide were estimated to be 9.8 per cent lower than in 2008.

Although this trend shows no signs of slowing, some unforeseen consequences of the silver lining have started to emerge. These may bear important lessons for the ways in which we address the urgent threat of climate change.

Permits to pollute
The fall in emissions is obviously welcome, but it has called into question the effectiveness of the European Union´s flagship system for reducing emissions, the Emissions Trading System (ETS).

Carbon trading – or cap and trade – is a market-based approach that controls pollution by providing economic incentives for achieving reductions in the emissions of pollutants. As Stavins explains, a central authority (usually a governmental body) sets a limit, or cap, on the amount of CO2 that can be emitted. Emissions permits, which represent the right to emit or discharge a specific volume of CO2, are allocated or sold to firms. The total amount of permits cannot exceed the cap, limiting total emissions to that level. Firms with excess emissions have the choice of making costly adjustments to reduce them or buying permits from those who have a surplus. So although the EU decides on the level of reductions (by setting the cap), the market is entrusted with the job of deciding precisely how these cuts are achieved.

However, with the unexpected fall in emissions accompanying the recession, there has been an increase in available permits. When economic activity picks up, these credits will be used to offset future emissions. As the NGO Sandbag has stressed ‘the current design of the ETS prevents us from capturing any environmentally beneficial side-effect of the recession within the traded sector. This is because the ETS currently lacks any mechanism to reduce the supply of permits in the event of rapidly falling demand, and any permits unused can be banked forward indefinitely.’

Lagging behind
This increase in carbon permits will have other consequences aside from the future increase in CO2 emissions – such as decreased incentives for businesses to invest in emission-cutting technology and a weakened drive for clean energy innovation. For many businesses the surplus in carbon permits may mean ‘business as usual’ for the foreseeable future in terms of both direct emissions (and oil consumption) and investments in alternative energy sources.

This will only exacerbate concerns that the EU is being left behind in terms of innovation for a low carbon economy. Meanwhile, countries such as China – reputed for its prioritisation of economic growth over environmental protection – forge ahead in terms of investment in a green economy.

20-20-20 to 30-20-20?
The latest set of EU agreements regarding climate change – known as 202020 – consist of a 20 per cent reduction in EU greenhouse gas emissions below 1990 levels, 20 per cent of EU energy consumption to come from renewable resources, and a 20 per cent reduction in primary energy use compared with projected levels.

Connie Hedegaard, the European Commissioner for Climate Action, recently reported in IIED’s Barbara Ward lecture that these targets were no longer enough to drive the response needed to address the urgent threat of climate change. This is partly due to the impact of the recession on carbon trading. More critically, others have argued that the 20 per cent target could probably be achieved without any domestic abatement of CO2 until 2017 at the earliest.

Hedegaard has proposed a move for the EU to a 30 per cent (rather than 20 per cent) reduction in emissions. This would not only reduce carbon emissions further, but would also give a stronger incentive for businesses to invest in low carbon development, and would, thanks to the recession, be relatively cheap. Beyond that, it has been recommended that the number of permits that are auctioned (rather than allocated) be increased to 50% for the next phase of EU ETS (2013 to 2020), from 3% in the previous phase, thereby increasing the carbon price.

Taking the plunge
Although 30 per cent is an important target for the EU, concerns have been raised over its effectiveness in the absence of a global mechanism to address CO2 emissions. China may be at the forefront of investments in low-carbon technology, but its greenhouse gas emissions have actually increased during the recession.

Until countries like China have an equivalent target to cut emissions, progress may be limited. A stronger EU target could simply increase CO2 ‘leakage’, whereby production of carbon-intensive products shifts to countries where there is no carbon price. Moreover, as a result of concerns over falling EU competitiveness in trade, a consortium of EU industries has led fierce resistance to a 30 per cent reduction in CO2 emissions. Leakage may in some cases be a legitimate concern, but it has also been argued that many industries have ‘not only been protected from potentially imaginary carbon leakage threats…but had, in fact, been competitively advantaged by Member States through excessive allocations of free carbon allowances’.

Surely someone needs to take the first step towards more ambitious targets that go some way to dealing with the future threat of climate? We can’t rely on ‘silver linings’ or blind opportunity. This is no time for inaction or stalemates. But who will take the plunge?