On 16 April, the European Parliament rejected by a vote of 334-315 the so-called “backloading” proposal that would have postponed the auctioning of a small share of carbon allowances to address a glut in allowances that has depressed the European carbon price over the past three years – thus leading to the drop in ETS prices. This seemingly technical matter and obscure vote has wide-ranging consequences.

A mere technical fix?

Backloading was always meant to be a technical measure: just postponing the auctioning of 900 Mt of allowances from 2013-15 to the last couple years of Phase III (2013-20), out of a cap for each year starting at approximately 2bn in 2013 going down by 1.74% / year, without affecting the overall volume to be auctioned in phase III, only the distribution of auction volumes.

Arguably, backloading was not going to do anything for investments, the economy, competitiveness, etc. This was nevertheless useful – not fundamental, in three ways. First, it was meant to create a bit of artificial scarcity. Second, to introduce an amendment providing a legal vehicle to enable structural reform later on. Thirdly, to  set aside allowances such that, with the politics hopefully evolving, they could be retrieved some time before 2020.

Obviously, it is because of the second and third considerations that industry opposed the measure fiercely. In fact, it can be suggested that those arguing that “we oppose backloading because we want actual reform” were dishonest. The intensity of lobbying against backloading was not an indication that  a better, more rational approach would have been preferable, but that opponents were – and still are – trying to keep the ETS irrelevant, even to break it.

Traders provide a clear demonstration of this: their faith in Europe’s ability to restore the ETS’s credibility fell to an all-time low, with allowances trading at €2.6 the day of the vote vs. €4.8 the day before. Analysts expect it to fall to €1 in coming weeks. “We saw a big fall in German power prices but also a plunge in the price of carbon, so that keeps the spreads from burning coal still very positive for generators,” said a coal trader quoted by PointCarbon after the vote.

Real implications for investments

The vote leaves Europe more exposed to ever increasing fossil-fuel imports and energy costs and undermines a key growth sector. Europe’s energy trade deficit reached a record in 2012 of -€422.5 bn and is expected to double by 2030 if no action is taken. The European Parliament voted against the principle of a European approach to its economy and against the single market. It has put Europe’s role in addressing its wider challenges seriously in doubt.

Whether this will have an impact on retrofitting vs. retiring of coal plants is very hard to say, as the impact depends on the long-term expectations of investors, when this vote is understood by observers not to be the end of the story on fixing the ETS. 

And for Europe’s standing in international climate negotiations

More clearly though, this vote will have a very significant negative impact on Europe’s reputation internationally at a time when low-carbon policies are accelerating across Asia and the Americas.

Already in early April South Korea’s deputy environment minister said that failure by MEPs to pass the backloading proposal could weaken the ambition of carbon markets being designed in other countries. Yeon-man Jeong said the failure to throttle supply of permits in Europe’s $148-billion scheme would affect the development of his country’s market. Similarly, the Australian media reported after the vote the uncertainty created for the Australian carbon market in view of the planned link up with the EU system.

With the crucial deadline of 2015 approaching for conclusion of an international deal on climate change, Europe’s procrastination in fixing its ailing carbon market is watched, considerably weakening its hand in getting other parts of the world to act more forcefully.

In fact, Europe’s so-called “climate leadership” is now a thing of the increasingly distant past. With a carbon market with prices near zero in 2015 and its 2020 greenhouse gas emissions reduction target already meant in 2012 (yes, you read correctly – Europe as it currently stands proposes to complacently not have any emissions reductions for eight years), Europe’s call for the rest of the world to “take action” will fall on deaf ears when it itself is no longer moving.

What next?

The Commission will push the proposal. Member States will discuss, with currently enough nations in favour in principle to clear the plan, even though German Chancellor Angela Merkel announced that there would be no decision from Germany until after the September general election and even though Poland, which depends on carbon-intensive coal, is fiercely opposed. The ball is now in the court of the Parliament’s Environment committee with a new vote expected in July.

The consequences are as intended by the opponents to reform of the ETS: the discussion is slowed down, making the introduction of ETS reform before this Parliament disbands in early 2014 more unlikely.

The European Commissioner for Climate Action, Connie Hedegaard summed it up neatly in her reaction to the vote: “(…) it is worth noting than when it was suggested in the second vote that the Parliament finalised its rejection right away, this was not supported. The proposal will now go back to the Parliament’s Environment Committee for further consideration. (…) We will now reflect on the next steps to ensure that Europe has a strong EU ETS. In doing so the Council’s position on the proposal will be an important factor and I take note of the Irish Presidency’s reaction today to urgently pursue and conclude discussions among Member States. The market, the investors and our international partners are all awaiting.”

Wisening up

Concern about the dire financial situation faced by many countries has taken precedence over the desire to tackle climate change and invest in new low-carbon sectors. Around half of the lawmakers that declined to vote were from Spain and Portugal. Conservative MEPs from Britain and Italy voted against their own government positions. This is a direct challenge to the environmental movement’s efforts to defend the stance that the ETS and, more broadly, fighting climate change is compatible here and now with economic recovery.

The state of the debate on climate policy in Europe needs to be reassessed in light of this vote. Industry lobby group Business Europe wasted no time in doing so: Europe’s climate policy “has been too much driven by climate in the past and will have to re-shape it and re-balance it to cost-competitiveness and security of supplies” argued BusinessEurope Director General Markus J. Beyrer in early May.

Europe’s environmental movement has been working on the assumption that the climate itself is a good reason to act. Europe’s largest political block has now shown conclusively that they do not agree in any way with that analysis. The extent to which the cost argument is being used against climate action underlines the absolute necessity of a strategy that understands that short-term cost implications can derail action completely and requires a more cohesive, detailed and compelling story on the path to green growth and the perilous exposure of Europe’s economy to increasingly costly fossil-fuel imports.