GTS is re*s 1* fijii** Friends of the Earth NESPIK CENSAT AGUA VIVA tmmn WATCH ttt it kk-sw *JCEO Counter $■$■:> Challenging Balance the Europear Investment Sank Myf/i3 10 "The EU ETS is a system that is functioning as intended, and it is flexible" 10 Myth 4 11 "The EU ETS is delivering cost-effective emissions reductions" 11 Box3: NER300 reserve revenue to subsidise coal power 12 Myth5 13 "The positive thing is that the ETS is working well" 13 Conclusion April 2013 Photo front page: www.sxc.hu 14 Executive summary Why the EU ETS can not be reformed. Given the urgent need to keep global warming within 1.5 degrees or less, it is vital that the European Union (EU) gives itself the best tools with which to reduce greenhouse gas emissions. In 2005, the EU launched its'cornerstone policy'1 to reduce emissions — the European Union Emissions Trading System (EU ETS) (see box 1). However, since the adoption of the EU ETS, emissions have risen; there is increased reliance on coal; the price of consumer energy has risen along with the profits of many industrial actors (as a direct result of the EU ETS) and millions of euros of public money have been lost in VAT fraud. Despite this troubling track record, key decision makers such as Connie Hedegaard, European Commissioner for Climate Action, and many policy makers in the EU, remain convinced that the EU ETS is a success and should remain in place for Phase III - until 2020 and beyond.2 This report will show that far from being the'best tool'to combat climate change, the EU ETS is inherently too weak to drive the sustainable energy transformation the EU needs in order to stay within global warming limits. It is systemically flawed and cannot be fixed. Proponents of carbon trading claim that the main flaws within the EU ETS are a result of poorly designed or badly applied rules. This report gathers statements from senior EU officials that continue to argue that the EU ETS has 'worked' in the past and will continue to do so in the future, despite the evident failure of the EU ETS to meet its own objectives.3 Their conclusion is therefore that it can be reformed. To this end, the European Commission is currently consulting on six potential reforms to modify the EU ETS.4 This report provides evidence to show that such reforms will never result in a functioning market, let alone transform the EU ETS into a tool that enables the EU to sustainably reduce its emissions. Claims that the market can be reformed are based on myths that this report dismantles by comparing them to reality. One key myth that this report refutes is the belief that the EUETS is a flexible tool with which to reduce emissions - explained in detail under Myth 3. The fundamental characteristics of the EU ETS mean that it is very difficult for it to respond to changes in supply and demand, in reality making it a cumbersome tool with which to regulate emissions5. Even creating ad-hoc discretionary price mechanisms for the ETS will never be sufficient to stabilise the supply of permits on the market.6 Another key myth is that the EU ETS is able to function properly, and that the current problems are merely related to oversupply. The authors of this report believe the problems with the EU ETS run far deeper and have to do with the very commodity being traded - explained under Myth 5. Issues to do with the methodology of commod-itising pollution mean it is very open to fraud, notably because it is not a physical commodity and has no natural 1 http://ec.europa.eu/clima/policies/ets/index_en.htm 2 http://europa.eu/rapid/press-release_SPEECH-11-527_en.htm 3 http://europa.eu/rapid/press-release_SPEECH-11-527_en.htm 4 http://ec.europa.eu/clima/policies/ets/reform/docs/com_2012_652_en.pdf 5 See Myth 3 6 Ibid. EU ETS myth busting: why it can't be reformed and shouldn't be replicated 3 lest: 41 Updated an: 13 February 2013 * 1 ETS in force ETS mt* mental en itriedded ET S under eciSMjef awn w w w. ica pea rbcmactinri .com □ evebpped in cooperation with ECOFYS buyers or sellers. These issues cannot be resolved. The problems that have led to the market's collapse are rooted in the core structures of the EU ETS. This is why our report concludes by demanding its end to the post-2020 in order to make space for real climate action. ...and must not be replicated Despite its many flaws, the EU ETS is being held up as an example for other countries to follow. In the midst of panicked discussions about how to save the EU ETS, the EU continues to encourage other countries to adopt Emissions Trading Schemes as the best tool to reduce emissions (see image above for a map of which countries are currently engaging in emissions trading systems, according to Ecofys). One example of such encouragement is the Partnership for Market Readiness (PMR), a joint EU and World Bank initiative that provides funding and technical assistance to 16'middle-income'countries to set up emissions trading systems.7 Perhaps even more worrying is that there seems to be a push for the principles of carbon trading to move beyond carbon into commercialising other parts of nature. The assumption that trading "works" has led to a paradigm shift in how countries deal with environmental protection. Pricing mechanisms like the EU ETS are being proposed to replace direct regulation and the setting of strong pollution limits in areas beyond carbon. In its communication on the Rio+20 conference, the European Commission (EC) claimed that "experience shows that market-based approaches such as emissions trading are not only cost-effective tools to address environmental problems but are also a source for investment".8 Carbon trading has set in motion a creeping commodification of nature that offers profits for traders, but paltry protection for the natural environment or communities living on and around the territories affected by either the offset projects or the industrial facilities that are allowed to continue polluting in the first place.9 To reduce emissions at source by the required amount, real changes in terms of EU consumption, production and infrastructure are needed, which will require making difficult political decisions to be made.The EU ETS was set up in order to allow the 'market' to produce this change, 7 These countries are Brazil, Chile, China, Colombia, Costa Rica, India, Indonesia, Jordan, 8 http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=C0M:2011:0363:FIN:EN:HTML Mexico, Morocco, Peru, South Africa, Thailand, Turkey, Ukraine and Vietnam. 9 http://www.ersnet.org/eu-affairs/item/4636-43-billion-the-health-cost-of-coal-fired- http://www.thepmr.org/content/about-pmr power-stations.html EU ETS myth busting: why it can't be reformed and shouldn't be replicated 4 but with so many vested interests at stake and structural loopholes, it is doomed to fail. What the EU needs is an open,science-and-justice-based debate about the climate actions we need, and the policies that will make them work. At a time when the trading model is being pushed into other areas of nature, this report explains why the EU ETS can't be reformed and should not be replicated. Summary Myth 1 "The EU ETS is the best tool for reducing emissions".11 Reality Emissions rose in Phase I (2005-2007). In Phase II (2008-2012) decreases in emissions were not linked to EU ETS but rather to the economic crisis. Myth 2 "The EU ETS acts as a major driver of investment in clean technologies and low-carbon solutions".12 Reality Phases I & II of the EU ETS have not triggered transformational investment in sustainable renewable energy or low-carbon technology. Myth 3 "The EU ETS is a system that is functioning as intended, and it is flexible".13 Reality The EU ETS is a cumbersome, unresponsive mechanism which has failed to achieve its own objectives. Myth 4 "The EU ETS is delivering cost-effective emissions reductions".14 Reality The EU ETS has not been cost-effective for either the public or consumer purse. Myth 5 "The positive thing is that the ETS is working".15 Reality The EU ETS is a Fraudsters' Paradise, fostering tax evasion, fraud, and other criminal activities. Box 1 EU ETS: The basics The EU ETS is meant to ensure high-emitting industry sectors deliver their share of the emission reductions that the EU has taken on under the Kyoto Protocol. The EU ETS covers approximately 11,000 plants in high-polluting industrial sectors across the 27 EU Member States, plus Norway, Liechtenstein, Iceland and Croatia. These industrial sectors include power generation, oil refining, iron, steel, cement, lime, glass, ceramics, and pulp and paper.10 The sectors covered by the EU ETS represent around 40 per cent of total EU emissions. Other approaches such as direct regulation are being used to reduce emissions in other sectors. The EU ETS functions through two mechanisms: the'cap-and-trade'systemwhich allows companies under the system to trade allotted carbon permits; and the'Linking Directive'which allows installations to buy carbon credits generated from'emissions-saving'or'offset'projects. These projects are implemented in other countries, primarily in the global South. Banks, investment funds, and brokers can also trade in permits and credits, and a range of derivative products such as 'futures'based on these permits and credits. 10 The EU agreed to reduce emissions by eight percent below 1990 levels for the first commitment period of the Kyoto Protocol (2008-2012). This target was translated into differentiated national emissions targets for each Member State. Besides the sectors covered under the EU ETS, each Member State is responsible for their Kyoto targets, which include other sectors: transport, agriculture (land use), waste, residential, commercial and institutional, and fluorinated gasses. See: http://ec.europa.eu/clima/ policies/ets/index_en.htm 11 See blog piece written bythe Environmental Defense Fund: http://blogs.edf.org/ climatetalks/2012/10/18/the-eu-emissions-trading-system-is-reducing-emissions-sparking-low-carbon-innovation-and-growing-up-really/and the relevant report they relate to: http://www.edf.org/sites/default/files/EU_ETS_Lessons_Learned_Report_ EDF.pdf 12 http://ec.europa.eu/clima/policies/ets/index_en.htm 13 Hans Bergman, Head of the Benchmarking Unit in the European Commissions DG Climate Action at Friends of Europe event, 20th March 2013. See: htt_//www: friendsofeurope.org/Contentnavigation/Events/Eventsoverview/tabid/1187/ Event Type/EventView/Eventld/1204/EventDatelD/1207/PagelD/6381/ EUEmissionsTradingSystemThechallengeofrestoringcredibility.aspx 14 European Commission (2012) "Emissions trading: annual compliance round-up shows declining emissions in 2011" 15 Bergman, 2013. Ibid. EU ETS myth busting: why it can't be reformed and shouldn't be replicated 5 Myth 7 *TX