[Premium] EU ETS Could Adopt UK Floor Idea

The EU Emissions Trading Scheme (ETS), launched in 2005, aims at gradually reducing greenhouse gas emissions by setting a yearly EU-wide cap on the total amount of emissions from energy intensive sectors. However, it has been continuously criticized since its beginnings for setting a carbon price so low that it actually makes no difference. And yet it could be the main solution for ditching coal in northwestern Europe, argued all panelists at the debate hosted by Ifri (Institut Francais des Relations Internationales) on May 4 in Brussels.

Coal used in power generation is responsible for just over a fifth – 21% – of the EU’s overall greenhouse gas emissions. ETS could become the main solution to drastically reducing this percentage, if combined with a carbon price floor, an initiative already  adopted by the UK since 2013. The Carbon Price Floor (CPF) is a UK policy implemented to support the EU ETS and drive low carbon investment, which the EU ETS has not as yet achieved. According to a paper produced by the UK's House of Commons January 2018, the carbon price in the EU remained broadly stable at around €5 (about $6)/metric ton of CO2, while the UK Carbon Price Support (the additional tax imposed on emissions) was £18/mt CO2 (about $25) in April.

The British initiative has been credited with contributing to the 85% drop in emissions from coal used in the power sector over the past five years. While the original objective of this policy was to push for additional renewable energy use in power generation, the general consensus is that natural gas has been the main beneficiary, according to official data showing the rising share of gas in power generation.

The British experience has prompted other major European countries, like France and The Netherlands, to suggest the adoption of a carbon price floor as well. In particular, France aims at “phasing out coal in favour of gas,” according to Ghislain Ferran, the head of carbon markets in the French government. Both France and The Netherlands have recently expressed their wish to bring other European countries on board in order to create a regional mechanism, more effective than a simple  measure at national level.

According to German energy expert Felix Matthes from the Oko-Institut, the German government  will refrain from negotiating any regional carbon price floor project until end 2018, when a national commission on carbon emissions is set to deliver its policy recommendations after a year of research.

Finally, both ETS and CPF are measures that aim at penalising the most carbon-intensive fuels, but if EU countries end up coming together to set up a regional system, they will have to fine-tune the mechanism: in the UK CPF is added on to the ETS by the government to raise the base price which is set by the EU market.