Emissions trading and Brexit

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4th May 2018

Discussing emissions trading and Brexit in Dublin


Earlier this week I joined a number of speakers in Dublin for a workshop on the EU Emissions Trading Scheme (ETS), organised by University College Cork.

I took part in a panel discussion on the ‘Impact of EU ETS Reform and Brexit for Irish Emitters’, alongside Professor John Fitzgerald, Chair of the Climate Change Advisory Council; Dave Fitzgerald, Group Head of Sustainability and Business Continuity with Dairygold; and Fergal Mee, Environmental Director with Chris Mee Group. 

In February, the EU Council formally approved significant reforms to Phase IV (2021-2030) of the scheme. This will result in the overall number of emission allowances being reduced annually by 2.2% (compared to 1.74% at present), while the amount of emission allowances to be placed in the market stability reserve will be doubled.

These changes are ultimately intended to correct the underperformance of the scheme. The dramatic decrease in activity and carbon emissions during the recession led to a flood of credits in the system. This means the carbon price is lower than forecast, and too low to act as a driver towards decarbonisation as was intended. 

The reforms to Phase IV are designed to ‘soak up’ these additional credits, and release them in a controlled way if pre-agreed criteria are met. Following agreement of the reforms the carbon price roughly doubled, due primarily to the market’s anticipation of the impact of the changes. This is a welcome development, as a robust carbon price can give a price signal to firms to change their behaviour and make investments to reduce their carbon emissions.

SSE believes carbon pricing is the most efficient way to drive decarbonisation, and supports the Phase IV reforms, although we still don’t see the scheme giving a strong enough investment signal.

I agreed with fellow panellist Professor Fitzgerald’s case for a carbon price floor, on the basis that it gives companies, such as ours, greater confidence when making investments in low-carbon technologies. SSE has found the mechanism to be effective in Britain, and we believe it’s worth considering for Ireland.

During the discussion, I outlined our top three ‘Brexit priorities’, namely preserving the all-island Single Electricity Market, maintaining trade across interconnectors, and refocusing on Ireland’s own domestic energy challenges.

I also noted our support for the UK remaining in the EU ETS, at least until the end of Phase III in 2020, and preferably for Phase IV. Energy UK, the trade association for the energy industry in Britain, has recently addressed the concern that the UK would have less influence over Phase IV rules, by pointing out that the architecture for Phase IV is all but complete, and the UK has had a leading role in the process. I pointed out that it has always been anticipated that the EU ETS would be linked with other schemes, and so if the UK was to exit the EU ETS at any stage, we believe that a compatible UK scheme could, and should, be designed.

A potential flood of UK credits into the market post-Brexit was also discussed, as was the converse, a potential stranding of UK credits. All panellists agreed that either scenario would create the kind of uncertainty that makes investment difficult. We applauded the creative and pragmatic solution reached for 2018, whereby the UK’s EU ETS installations will report early to complete the process before the Brexit deadline.

Whatever else happens, it’s crucial that the process for the years ahead is agreed as early as possible. In a period of unprecedented change for the EU and our industry, ensuring that energy policy can continue to evolve steadily, without facing a ‘cliff edge’, will allow us all to ready ourselves for an altered operating environment.

SME, Market Insights

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