Fix EU ETS then create globally linked carbon market, MPs urge

Richard Croft/Creative Commons
Richard Croft/Creative Commons

Tackling carbon emissions on a global basis is the only way to avoid ‘squeezing the balloon’ and simply shunting emissions into different regions. Today, the Energy & Climate Change Committee has urged policy makers to ensure that bottom-up, sub-national and national trading schemes that are taking root can be linked-in to a global trading system in the future. It also recommended urgent action to remove the surplus of permits hampering the effectiveness of the EU ETS.

Around 1,000 UK firms are covered by the EU Emissions Trading Scheme, which is the world’s oldest and largest carbon trading scheme. However, the EU ETS has had limited success in curbing emissions because there are too many allowances in circulation, a situation exacerbated since the steep drop in output triggered by the financial crash of 2008. That has meant carbon prices – and therefore incentives – have tanked. It has also been argued that a regional solution that does not include the world’s biggest emitters is ultimately futile.

But China and the US are now building, or at least piloting, their own national emissions systems and many other national and subnational schemes have sprung up in recent years. The Committee’s report outlines the need for trading systems to be designed so that they can be linked in the future, and stresses the need to ensure new trading schemes are compatible with the EU ETS.

The report also calls for action to be taken on removing, at least temporarily, around a billion excess carbon credits from the EU ETS by 2017, not left until 2021. The current preferred option is a strategic market reserve mechanism (MSR), which would take the credits out of circulation, and act as a controller in times of tightness and potential price spikes.

Read the full report here.

UPDATED 25/02/15: The EU’s environment committee has voted to implement the reserve mechanism by the end of 2018.

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