Fixing the EU's Emissions Trading Scheme is crucial for our energy future

This opinion piece from SSE Ireland Managing Director, Stephen Wheeler, appeared in today's Irish Independent.

It’s been said that we’re the first generation to feel the effects of climate change, and the last that can do anything about it.

In 2015, world leaders signed up to the COP21 Paris Agreement, pledging to strengthen the global response to climate change and to keep global temperature rises this century to 2 degrees Celsius or lower.

And as if to emphasise the urgency with which that global response is required, 2016 became the warmest year on record; indeed since 2001, 16 of the 17 warmest years recorded have occurred. 

The EU has taken a leadership role in the fight against climate change, setting targets for renewable energy, carbon emissions and energy efficiency.  Ireland can be rightly proud of the significant advances we’ve made in reducing the carbon intensity of our electricity generation portfolio. 

Right now, EU Member States are negotiating changes to the cornerstone of its climate strategy, the Emissions Trading Scheme or ETS, and tomorrow EU Environment Ministers will meet to discuss fundamental changes to that cornerstone.

The ETS is a ‘cap and trade’ scheme, designed to help minimise greenhouse gas emissions and limit rising global temperatures. When introduced in 2005, it was the world’s first major carbon market and is still the biggest.  It covers sectors including electricity and heat generation, as well as energy-intensive industries such as oil refinery, steel works, production of aluminium, iron and cement, and commercial aviation. 

The basic principle of the scheme is that for each tonne of CO2 equivalent emitted, a credit must be surrendered.  If not, the emitter faces heavy fines. The scheme releases a certain number of credits per year for auction, and these credits can be bought and sold by companies operating in the sectors as needed. 

For those companies they can choose to either reduce emissions or pay for credits. If it is cheaper for a factory, airline or power station to reduce emissions than pay for carbon credits, then it will do so; and if it’s cheaper to continue emitting rather than pay for credits, then it will do that.  This means that the cheapest carbon reduction measures are taken first, leaving innovators to come up with new, cheaper solutions for the rest.  And that’s the beauty of the scheme; it allows companies and investors to decide when it’s the right time for them to take action, being responsive to new innovations and cleaner technologies as they become available, rather than having regulators setting limits for each industry.

The problem is the scheme hasn’t been working as planned. The number of credits released for auction since 2005 was based on projections at the time.  Nobody predicted the global financial crisis, which meant reduced production for the ETS sector industries.  That led to a build-up of unused credits in the system. 

As a result there’s now a glut of credits, and so the price of those credits simply isn’t sufficient to encourage investment in low-greenhouse gas solutions. 

So, what’s the solution? Two weeks ago European Parliament MEPs approved a package of measures to reduce that glut, including a mechanism to soak up some of those surplus carbon credits into a ‘reserve’, to be held as a safeguard against sudden carbon price increases in the future.  The package is seen as a key measure to deliver the COP21 Paris Agreement and will include regular reviews to ensure the revised ETS provides the necessary price signal to investors.

Of course, as a consumer rising prices for anything doesn’t sound welcome. 

We must be honest with ourselves that reducing carbon emissions will have a cost.  But it will also bring real benefits – protection of the planet, cleaner air, and reduced reliance on imported fossil fuels.  And we can’t forget that continuing to emit damaging gases to the environment will also cost, and that cost could be globally catastrophic. 

Some industries argue that the ETS could drive industrial production out of the EU, to places in the world where they don’t have to pay to emit greenhouse gases.  The new package of measures agreed by the European Parliament two weeks ago includes mechanisms for member governments to address the potential threat of ‘carbon leakage’ so that industry remains here.

Tomorrow, EU Environment Ministers will meet to discuss the Parliament’s proposals. Hopefully they will agree to endorse those proposals and in doing so will set a clear path to further greenhouse gas reduction, giving ETS industries – including energy companies such as SSE – the certainty necessary to make the right cleaner investment decisions that will protect our planet, now and in the years to come. Not to do so could cost us dearly, and in ways that are simply unthinkable.  

About the author

Stephen Wheeler Managing Director, SSE Ireland

Read more articles by Stephen Wheeler