By Ricardo Coelho

September 16, 2012 -- Corner House/Carbon Trade Watch -- The first two phases of the EU Emissions Trading Scheme (2005-2007, 2008-2012) allocated free permits according to historical emissions; a practice known as "grandfathering" that has acted as a de facto subsidy for the biggest polluters. Electricity producers, for example, by increasing electricity prices in line with the price of the permits they received for free, have made windfall profits of between €23 to €71 billion during the second phase. The third phase (2013-2020) will still see significant subsidies paid to industry.

Given the additional fact that too many of the permits were allocated, prices were volatile and low, allowing polluters to buy their way out of reducing emissions very cheaply. At the end of 2007, the price of carbon permits bottomed out at €0.02, down from an average €20 to €30 one year before. With allowance prices set to continue at a level powerless to incentivise structural change, the idea that the EU ETS could help address climate change has simply fallen by the wayside. The offset credits used in the system, which are priced even lower, are meanwhile regarded as the “world’s worst-performing commodity”.

Permits for the third phase are supposed to be auctioned to power producers instead of being given away free. However, the cost of permits can be easily passed on to consumers. The electricity industry, with the support of the oil industry, has also managed to grab a subsidy from the auction of 300 million permits from the New Entrants Reserve (for new companies that join the EU ETS) to use in "clean energy" projects. These include the risky technologies of carbon capture and storage (CCS) and agrofuels, both of which help lock in a pattern of high, fossil-fuelled energy use.

The European Commission is both commodity supplier and regulator in the EU ETS, making the market easy prey for corporate manipulation and rent-seeking. Here, as elsewhere, carbon trading is being used to pre-empt and delay the structural changes necessary to address climate change. Proposals for reform, all of them premised on plans for expanding rather than phasing out carbon markets, function to make the situation even worse.

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