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Europe Rejects Bid to Raise Cost of Carbon Emissions E.U. Carbon System in Doubt as Higher Permit Prices Rejected
(about 5 hours later)
LONDON — The European Parliament voted narrowly in Strasbourg on Tuesday to reject a measure to raise the costs of emitting greenhouse gases for electric utilities and manufacturers, placing the future of the European Union’s flagship effort to combat climate change in doubt. LONDON — The European Parliament on Tuesday rejected an attempt to raise companies’ costs of emitting greenhouse gases, dealing a potential death blow to Europe’s world-leading effort to use emission permits to combat climate change.
The European Emissions Trading System, or E.T.S., has been losing credibility even as other countries like China consider adopting similar measures to help bring down greenhouse gas emissions, which scientists have linked to global warming. But in the 334-to-315 vote, members of the European Parliament seemed to focus less on the global implications than on not wanting to add further to energy costs in Europe. Natural gas prices in Europe are roughly three times those in the United States, which is benefiting from the shale gas boom. The proposal was meant to put teeth into efforts to reduce carbon emissions from the smokestacks of utility companies and manufacturers, by curtailing the availability of permits that allow companies to emit greenhouse gases into the atmosphere. Scientists have linked such gases to global warming.
“This is a crisis in European leadership on the climate issue,” said Anthony Hobley, head of the climate change practice at Norton Rose, a law firm in London. “We have reached the stage where the E.U. E.T.S. has ceased to be an effective environmental tool.” The proposed measure, which in effect would have made it much more costly to pollute, was narrowly rejected in a 334-to-315 vote.
After the vote, the price of a carbon allowance, which allows a factory to emit one ton of carbon, fell sharply to just above 3 euros per ton from about 4.50 euros per ton an hour earlier. In voting down the proposal, members of the European Parliament seemed to focus less on the global environmental implications than on holding down energy costs as Europe continues to struggle to revive economic growth.
Stig Schjolset, an analyst at Thomson Reuters Point Carbon, an Oslo-based research firm, said prices might remain in the current low range “for some time.” He said the current effort to fix the market by withdrawing allowances was “mostly dead.” “Europe’s flagship climate change policy tool will become irrelevant for the near term at least,” Kash Burchett, an analyst at the market research firm IHS in London, wrote in a research note Tuesday.
The Parliament turned down a proposal from the European Commission, the executive arm of the European Union, to bolster the price of carbon allowances by withdrawing about a quarter of the allowances scheduled to be auctioned through 2015. Even before the vote, the price of allowances had plunged from 25 euros a ton in 2008, to 7 euros a year ago, to less than 3 euros earlier this year. The main reason for the collapse is the economic crisis in Europe, which has meant reduced industrial activity and a glut of allowances. At issue is the European Union’s Emissions Trading System, which, when introduced in 2005, was considered a potential global model for gradually raising the costs of emitting greenhouse gases and encouraging industrial users of coal and other carbon-heavy fuels to pursue cleaner types of energy.
At that price level, the system was failing in its intended purpose of encouraging companies to cut emissions and invest in clean energy technologies. Analysts say a price of 30 euros a ton or higher is needed to influence companies’ behavior. Carbon emission permits are essentially licenses to release greenhouse gases. Permits are priced in units that allow the holders to emit a ton of greenhouse gases. Because a big user of coal-burning power plants might release millions of tons of greenhouse gases a year, the higher the prices for the permits, the higher the cost for polluting.
Laura Dzelzyte, a director at CF Partners, a carbon trading and investment firm in London, said those who opposed the measure were concerned about other things than just a technical fix. “It turned into a much larger debate on energy and where Europe stands in terms of its economy,” she said. The idea behind the Emissions Trading System — which has been pursued by countries including China and Australia, as well as the state of California — was to create a market in allowable emission credits by putting a cap on the amount of those credits and letting companies and investors trade those rights.
Connie Hedegaard, the European Union’s commissioner for climate action, expressed “regrets” for the vote and said it would be sent back to the Parliament’s environment committee for further consideration. But a glut of permits has meant prices have been so low that big carbon polluters have had little incentive to curtail their smokestack emissions. After the vote Tuesday, the market price of a carbon allowance, which lets a factory emit one ton of carbon, fell about 40 percent, to €2.63, or $3.47, a ton. Later in the day it recovered to €3.15.
In a statement, the European Socialists and Democrats bloc in the Parliament said it had supported the measure and “expressed their deep concern that a conservative-led majority today failed to act responsibly, not only to make sure we have effective climate policies, but to secure the E.U.'s global leadership against climate change and create an efficient policy framework for those companies investing in energy efficiency.” “Prices will sink very low — potentially below €1 a ton and liquidity will dry up,” Mr. Burchett wrote.
Analysts say a price of €30 ton or higher would be needed to persuade companies to switch to cleaner fuels like natural gas, the main alternate fuel to coal for producing electrical power. Natural gas is priced about three times higher in Europe than in the United States, which is benefiting from the shale gas boom.
Some European industry groups and conservative politicians on Tuesday applauded the defeat of the measure, which would very likely have put upward pressure on electricity prices as well as adding to the costs of manufactured goods.
“Arbitrary interventions in the carbon market would just make it more difficult for businesses to produce cost-effectively in the E.U.,” Eurochambres, which represents millions of European businesses, said in a statement after the vote.
Conservative British members of the European Parliament, who opposed the measure, seemed to be concerned about both tampering with a market and the possible economic consequences. In a statement, they expressed concern about changing the auction timetable “in order to manipulate the carbon price.”
Doing so, they said, “will only serve to discourage green investments” and “undermine much needed market predictability as the E.U. economy strives to find a way out of the economic crisis.”
Meanwhile, advocates of carbon trading systems conceded that the vote was a severe blow to the European effort to use carbon permits to reduce greenhouse gas emissions.
“This is a crisis in European leadership on the climate issue,” said Anthony Hobley, head of the climate change practice at Norton Rose, a London law firm. The Emissions Trading System “has ceased to be an effective environmental tool.”
Stig Schjolset, an analyst at Thomson Reuters Point Carbon, a research firm in Oslo, said carbon permit prices might remain in the current low range “for some time.”
The vote rejected a proposal from the European Commission, the executive arm of the European Union, to effectively raise the price of carbon allowances by limiting their availability. The plan had called for postponing about one-quarter of the allowances that would be auctioned through 2015, deferring them until 2019-20.
The price of allowances have plunged from €25 a ton in 2008, to €7 a ton last year, to less than €3 earlier this year. A big reason for the price collapse is the economic crisis in Europe, which has meant reduced industrial activity and a glut of unused allowances.
The idea behind the rejected proposal was to “stop the bleeding” and halt the price decline, Connie Hedegaard, the E.U. commissioner for climate action, said in a telephone interview.
Ms. Hedegaard noted that the commission was also preparing more fundamental changes for the Emissions Trading System. But she noted that those, which include permanent retiring of some allowances, might be even more difficult to push through the European Parliament than the proposal rejected Tuesday. “This is difficult stuff and challenging when you have a crisis and the focus is on all sorts of costs, ” she said.
Still, Ms. Hedegaard indicated she had not given up hope of either resurrecting the defeated measure or more fundamental fixes. She said some of the no votes arose from lawmakers’ ideological objections to tampering with a market rather than lack of support for the trading system itself.
She took heart, she said, from the interest in cap-and-trade systems in other parts of the world. China, for example, has several pilot projects under way, and Australia is well on the way to adopting a cap-and-trade system, though Europe’s troubles could give ammunition to its critics.
The United States House of Representatives passed a cap-and-trade program in 2009 but it died in the Senate, and there is no prospect of its being revived anytime soon. California, on the other hand, has begun a carbon trading system.

John M. Broder contributed reporting from Washington.