Professor Jepma: 'The greenhouse gas emissions trading system is not working'

The greenhouse gas emissions trading system – set up to encourage countries and companies to produce less greenhouse gases – is not working properly. It is almost inherent in the system that the emissions market will collapse sooner or later, causing serious repercussions when it comes to dealing with climate change. This is the view of Catrinus Jepma, Professor of Energy and Sustainability at the faculty, who is to appear in a documentary on the subject to be broadcast on British Channel 4 on Monday 23 April.

The European Union Emissions Trading Scheme (EU ETS) was set up by the European Union to reduce emissions of greenhouse gases. It lays down the maximum amount of greenhouse gases that each polluting company is allowed to emit per year. Companies that emit less than their quotas can sell the surplus to companies that are over their limits. Meanwhile, however, the price of ETS emission rights has fallen below 1 euro (per tonne of CO₂), making them almost worthless. In Catrinus Jepma’s opinion the dramatic drop in price shows up the weaknesses of the EU ETS: the greenhouse gas limit for each company has invariably been set too high, and the way prices change is unpredictable, which puts off investors.

Information gap
The limits are set nationally, in a National Allocation Plan (NAP). Jepma points out that the civil servants involved do not have the up-to-date information that the companies have. ‘They do not know precisely what is available in the area of cleaner technology and how much is going to be invested in it.’ It is not in the companies’ interests to pass on this information, and they pretend that reducing greenhouse gas emissions is difficult. On top of this, government agencies have so far been accommodating in many cases, as they do not want their national industries to become less competitive as a result of having to spend a lot of money on emission rights.

Gloomy prospects
The high emission quotas have resulted in an over-abundance of emission rights in the EU ETS and a consequent dramatic fall in price. Some commentators think that the problems with the EU ETS will be solved when the scheme enters into its second stage in 2008 (the first stage runs from 2005 to 2008). Jepma, on the other hand, is pessimistic about this, as during that period the prices in the EU ETS will in practice be more or less linked – under the ‘Linking Directive’ – to the prices of similar emission rights in the ‘global’ system developed under the Kyoto Protocol. Under this system countries will be able to do the same as companies under the EU system: countries with surplus emission rights will be able to sell them to countries with a shortage. According to Jepma’s calculations, however, the price of these global emission rights will also be very low in a few years’ time – which in turn will have a negative effect on the European emissions market.

Surplus
The reason that prices on the global emissions market are expected to fall is that countries such as Russia and Ukraine have stipulated that they only have to stabilize their emissions at 1990 levels, so they are likely to have a substantial surplus of emission rights. In addition, the Kyoto Protocol allows emission rights to be sold on the strength of projects in developing countries. Jepma believes that the combined supply of emission rights from Central and Eastern Europe and the developing countries will be so large as to be well in excess of the international demand (mainly from the EU, Japan and Canada) in the years ahead.

Greenhouse gas tax
These problems with the European and global trade in emissions mean that the whole aim of the operation – to charge a realistic price for greenhouse gas emissions – will probably not be achieved. In Jepma’s opinion, serious consideration therefore needs to be given to replacing emissions trading with, say, an international greenhouse gas tax. ‘That would provide a lot more security for investors and consumers. Otherwise this first decade of serious international climate policy could ultimately turn out to be a missed opportunity to charge for greenhouse gas emissions.’

Press note:
For further information please contact Prof. C.J. Jepma, tel. (050) 309 6815 or 06-466 116 14, evenings (050) 309 1572, e-mail c.j.jepma@rug.nl.