Interview conducted by Muryel JACQUE for Les Echos (edition of 15 January 2019),
Raphaël Trotignon, a researcher in energy and climate economics at the Climate Economics Chair at the University of Paris-Dauphine, believes that the reformed European CO emissions trading scheme should now work better. But its governance remains weak.
What will this renaissance of the carbon market bring?
The reform implemented revives this market that was moribund. It can once again become an important tool in the European Union’s climate ambition, as it serves to reduce CO2 emissions from industrial installations. A sufficient increase in the carbon price encourages the covered entities to reduce their emissions by improving their production processes or developing ‘low-carbon’ technologies. The current increase in the carbon price also attracts investors and pension funds.
What are the limits of the market?
The governance is the main issue and it should be reviewed. Today, the system is not reactive. The stability reserve that was created with the market reform to absorb excess CO2 quotas is a good thing, but it works with a two years delay and in a ‘robotic’ way. A central carbon bank would be needed to manage the market, to ensure transparency and credibility on the scarcity of allowances distributed. For an economist, the carbon market is like monetary policy! The problem is that the current EU treaties do not allow for the establishment of such an independent authority.
We are therefore not immune to a price collapse in the future….
That’s right. The market is based solely on political credibility. There are no physical stocks, as there are for oil or wheat.
Is there an “ideal” price for carbon?
No. The covered entities must compare the cost of reducing their emissions with the market price of CO2 allowances. The higher the price of the allowance, the more incentive they have to implement the lower-cost reductions. For example, the price that favours the transition from coal to gas in electricity is estimated at 30 euros, because it would then become more expensive to produce from coal, since coal contains more carbon than gas. Sometimes it is necessary to go much higher, for example to make the carbon capture and sequestration processes profitable. To do this, the price must reach 70 to 100 euros per tonne.
Aren’t manufacturers likely to export their pollution if prices rise too high?
That is why the EU is trying to find compensation for those exposed to extra-EU competition. This problem does not exist with electricity: prices can be raised without the risk of unfair competition. But for cement, steel, glass… manufacturers say they could produce elsewhere, for example in the Maghreb or Turkey. The free allocation of allowances given by EU Member States, which act as subsidies, has so far prevented this phenomenon. In some cases, they have even been very favourable to industries whose emissions had fallen following the 2008 economic crisis.
A regional carbon exchange will not solve a global pollution problem….
Of course. But with the creation of this market, the EU’s aim was to inspire and convince others. It is partly a success, most of the countries or regions where an emissions trading mechanism has been set up have looked to Europe to design their own system. The world is moving towards more markets and more carbon pricing. But we are not moving towards an interconnected global market. This is a fantasy. The existence of different markets is a step in the right direction, because it has the merit of creating information sharing and good practices, as well as the emergence of new technologies that benefit everyone.