The EU Emissions Trading System (ETS) was introduced in 2005 as a “Cap & Trade” scheme to reduce emissions. The theory was that the right to emit CO2 would be traded, and therefore permits would go where they were most economically useful. The price of the units would send a “signal” to the market, which would promote energy conservation and new low-carbon technologies.
It was anticipated that the price would start out around €25 a ton (a level at which very “dirty” fossil fuels like lignite would start to be squeezed out), and progress over the years to €75, which would virtually exclude all fossil fuels.
The ETS was hailed as “a market system” that would allocate a scarce resource – the right to emit CO2 — in an efficient way. In fact, for almost all of that time the price has languished below €10. It has failed to give the market signals intended. But it has created a huge administrative burden on industry, and spawned a new (and totally non-productive) business in “carbon trading”, in which many people have made a lot of money without benefiting the economy in any way.
Recognising the effective failure of the grand scheme, the EU introduced a sticking-plaster response – “back-loading”. This removed some 900 million “allowances” from the current auction round for permits, but the effect on pricing was negligible. Some member-states became so frustrated with this failure that they introduced country-specific measures (undercutting the pretence of a Single Market). One such measure was George Osborne’s “Carbon Floor Price”, introduced in April 2013, a measure which directly impacted the competitive position of UK industry against continental competitors.
Recognising the on-going failure of the ETS programme, the EU institutions are now debating yet another sticking-plaster solution: the “Market Stability Reserve”, or MSR.
Under the Commission’s proposal, starting from 2021, with the fourth ETS trading period, 12% of the allowances in circulation would be placed in a reserve if the number of allowances in circulation two years earlier exceeds 833 million.
No one seems to recognise the irony of a “market mechanism” which requires constant regulatory intervention to achieve the price levels originally envisaged. Markets set their own prices autonomously – that’s what a market is. We now have the worst of all possible worlds – the cost of operating a market, but a price being set by repeated regulatory intervention. It’s not a real market at all. It’s simply the most expensive and cumbersome method yet invented to impose a tax.
The MSR has been the subject of heated debate in the parliament, and the battle lines are drawn. The left and the greens are keen to impose the MSR as soon as possible, and want to bring it forward to 2017. Those who understand Europe’s competitive position in the world (and that includes UKIP) don’t want it at all.
On the industry side, a similar split is emerging. Energy suppliers want the MSR, as the only mechanism available to enable them to achieve the emissions targets the EU has set out. And they are confident that they can pass on the higher costs – forgetting that many of their most energy-intensive customers will move – indeed are already moving – out of the EU altogether to escape the suicidal energy policies which Brussels is imposing.
Intensive energy users, on the other hand, are in despair. Already clinging on by their finger-tips in the face of global competition, they fear that this is the coup-de-grace. In the past week I have met with the aluminium, steel and petroleum refining industries. They all tell the same story: EU production in decline, plants closing, jobs lost, imports rising. We are exporting production and jobs and investment, outside the EU altogether. And emissions. Often this activity goes to jurisdictions with lower environmental standards, leading to higher emissions. In steel, imports can represent twice the emissions per ton compared to EU production. In petroleum refining, it’s plus 35%.
Aluminium has lost 42,000 jobs since 2007 (while imports rise). Steel 80,000. Petroleum refining 10,000 direct jobs, and an estimated 40,000 indirect. Chemicals, glass and cement can tell similar stories. This is what former Industry Commissioner Antonio Tajani called “an industrial massacre in Europe”.
Yesterday I attended another debate on MSR (and intervened robustly). I told them that if their MSR project failed, as previous sticking plaster solutions have done, then we should be back in the same debate again in five years’ time But if it “succeeded”, that meant higher energy prices in Europe (the steel industry reckons energy prices up 40% by 2020). More job losses. More plant closures. More industry and investment moving out of the EU. The deindustrialisation of Europe. And quite possibly, higher emissions. That’s a very strange kind of “success”.
The word “mad” is hardly strong enough. This is economic and industrial suicide. But the EU institutions are determined to press ahead with it. And believe it or not, the British government is urging MEPs to support both the MSR and the earlier start date. Madness has a name: Ed Davey.