Reviving the European Union’s Emissions
Trading System: Structural Reform of the EU
ETS
Master's Thesis
MSc Political Science: International Relations
Author: Miles Knight
June 2016
First Reader and Thesis Supervisor: Prof Dr J.H. Zeitlin
Second Reader: Dr. P. Schleifer
Acknowledgements
The writer of this thesis would like to thank Prof Dr J.H. Zeitlin for supervising this project. Professor Zeitlin has provided excellent intellectual insight into the evolution of governance. Furthermore, he has also provided the inspiration for researching this topic by providing an outstanding overview of current political developments within European Union.
I would also like to thank the Dr. P. Schleifer for taking giving up time to be the second reader of this thesis.
Finally, I would like to thank and express my gratitude to all six interviewees who kindly gave up a great deal of their time and knowledge towards for the purpose of this research.
List of acronyms
COM – European Commission
DG CLIMA – Directorate-General Climate Action [a subsidiary of the European Commission] EG – Experimentalist Governance
ENGO – Environmental Non-Governmental Organisation
ENVI – The European Parliament’s Environment, Public Health and Food Safety Committee of MEPs EU ETS – European Union Emissions Trading System
EUA – EU Allowance [GHG permit] GB – Interest-Group Bargaining GHG – Green House Gases
IGB – Intergovernmental Bargaining IPD – Institutional Path Dependency
ITRE – The European Parliament’s Industry, Energy and Research Committee of MEPs MEP – Member of European Parliament
MS – Member State
MSR – Market Stability Reserve NFG – New Forms of Governance OMC – Open Method of Co-ordination
Contents
1. Introduction ... 5
1.1 Climate change and the complexity of transnational mitigation ... 6
1.2 A transnational climate mitigation instrument for the European Union: Directive 96/61/EC - the EU ETS ... 7
1.3 Problem formulation & research questions ... 8
2. Theoretical framework & literature... 11
2.1 New forms of governance in the EU [NFG] ... 11
2.2 Experimentalist Governance [EG] ... 12
2.3 Approaches to political bargaining: interest-group bargaining [GB] and intergovernmental bargaining [IGB] ... 14
2.4 Institutional path dependency [IPD] ... 16
2.6 Cap-and-trade systems, their strengths and weaknesses ... 17
2.7 The Market Stability Reserve ... 19
2.8 Section summary; a gap for new research... 20
3. Methodology ... 21
3.1 Data ... 22
4. The 2050 roadmap and the EUA surplus imbalance ... 23
4.1 Defining long-term goals for the EU ETS: the 2050 roadmap ... 24
4.2 A milestones for the 2050 roadmap: the 2030 framework ... 25
4.3 The carbon market crisis: EUA surplus imbalance ... 26
5. Short-term structural reform of the EU ETS: ‘Back-loading’ ... 27
5.1 Initiating preliminary deliberation of EU ETS structural reform ... 28
5.2 Launching a stakeholder consultation on review of EUA auctioning – presenting the option of ‘Back-loading’ ... 30
6. Long-term structural reform of the EU ETS: the Market Stability Reserve ... 33
6.1 Preliminary deliberation of strengthening the EU ETS ... 33
6.2 Stakeholder consultation on structural options to strengthen EU ETS – presenting the MSR ... 36
6.3 Expert meetings on EU ETS structural reform – refining the MSR ... 38
6.4 The Co-Decision Procedure and the Market Stability Reserve ... 39
6.4.1 The impact of the European Council upon the final outcome ... 40
6.4.2 The impact of the European Parliament upon the final outcome ... 41
7. The Market Stability Reserve and the road to 2050 ... 43
7.1 Driving down greenhouse gas emissions through decarbonisation ... 45
8. Conclusions ... 45
1. Introduction
Climate change is a global issue that requires transnational solutions. At the core of the issue is the anthropogenic emission of greenhouse gases which are driving force behind global warming. For decades the international community has attempted to resolve the issue through intergovernmental bargaining, nonetheless many of these attempts have fallen short of their targets [i.e. the Kyoto Protocol]. The European Union has taken it upon itself to set an example of how to abate greenhouse gas emissions in a transnational setting. Sitting at the heart of this ambitious plan is European Commission who has designed a long-term framework for transitioning towards becoming a low-carbon economy. Imperative to this vision is the goal to cut greenhouse gas emissions by 80-95%% below 1990 levels, by the year 2050 (European Commission, 2011). Central to achieving this is the EU Emissions Trading System [EU ETS]; established in 2005 as the “cornerstone” of the EU’s GHG emission reduction strategy. This economic instrument utilises the concept of the market to find and set prices for CO2 allowances that are distributed by the Commission, either freely or at auction (EU Commission, 2013: 2) (Skjærseth & Wettestad, 2010). During each phase of the trading, allowances are removed from the market to reduce the ceiling, encouraging businesses within the system to make deeper investments in clean technology to avoid paying for expensive carbon permits.
In practice, the market has failed in its most recent phase beginning in 2013. Surpluses of allowances were made available due to low demand for fossil fuels throughout the 2008 financial crisis, as a result, allowance prices have plummeted from 30 Euro/tCO2 to levels below 5 Euro/tCO2, and have failed to recover ever since (Schopp, et al. 2015). To resolve this chronic issue, extensive structural reforms have been requested by stakeholders through dialogue with the European Commission, and carbon market experts. Resultantly, the ‘Back-loading’ amendment to auction regulation was adopted as the short-term solution in 2014 to take immediate effect, followed by the Market Stability Reserve [MSR]; adopted as the long-term solution and due to operate indefinitely from in 2019. Whilst a long-term solution has been established, the reform process has been delayed blocking parties in the European Council, rejected proposals by the European Parliament and lobbying by numerous stakeholders. In an amongst the political deadlock local stakeholders including trade organisations, environmental NGOs and market experts have worked towards shaping the final outcome of reform alongside member state representatives.
The final outcome [the MSR] is expected resolve the surplus imbalance, improve the systems functionality, and enable the EU ETS to remain as the EU’s first-best policy instrument for achieving the 2050 roadmap goals. With the hopes of the EU’s climate goals pinned on the MSR, this thesis aims to investigate is the ability of mechanism to revive the EU ETS. In order to do so this research
determines the extent to which interest-group and intergovernmental bargaining, institutional path dependency, or recursive learning from past failures and local stakeholders can explain the
development and functionality of the final outcome. Subsequently, the argument presented in this paper is that features of experimentalism such as recursive learning from past failures and local stakeholders can help to create more robust reforms; reducing the negative aspects of uncertainty and political bargaining between member states, trade organisations and the European Commission. In theory, this promotes stability within the EU ETS creating a safer environment in which market actors can invest in low-carbon future.
1.1 Climate change and the complexity of transnational mitigation
Anthropogenic emissions of green-house gases are now at the highest recorded level in human history. Scientists across the globe have observed and proven with ‘very high’ certainty that the warming of the climate system over the previous 60 years has been catalysed by anthropogenic emissions of GHGs. Carbon dioxide forms the largest concentration of all GHG gases in the
atmosphere much of which is emitted through processes of combustion in engines in the generation of power. For this reason it is deducible that transport, power generation and the industrial sectors across the world form the crux of CO2 emissions, thus they have become the prime target for mitigation efforts by governments and civil society. The urgent need for mitigation stems from the agreed need to contain rising global temperatures within a 2 degree centigrade threshold. If this threshold is exceeded, the damage upon natural systems will be catastrophic and irreversible having severe knock on effects in the human environment that will ultimately claim more lives than it has already (IPCC, 2014).
In many senses, proving through science that humankind is to blame for the current rise in global temperatures was comparatively straight forward; the step of generating global mitigation efforts is much harder. The mere notion of mitigation against climate change is one that has incurred great deliberation based upon historic, economic and philosophical arguments. The core of the dilemma is that no single state, company or section of society can or will bear the blame for the human races’ epic environmental blight. Effectively, this has led to a game of pass the GHG buck; the ramifications of this have meant that international climate negotiations have stalled numerous times until the late efforts of the COP21 meeting in Paris signalled a breakthrough. Meanwhile, industry and by extension its customers have escaped until recently from being held accountable for their role in inducing climate change. From and economic standpoint, the environmental impacts of
trading and consumption is an externality that has failed to be recognised and factored into the cost of goods, this has been referred to as “the greatest market failure the world has ever seen” (Stern, 2006: 1) (Callon, 2009). This is a situation that cannot persist if we wish to escape an impending tragedy of the commons catalysed by climate change (Hardin, 1968).
1.2 A transnational climate mitigation instrument for the European Union:
Directive 96/61/EC - the EU ETS
The EU produces 10% of global emissions, yet it has proudly striven to become the international leader in climate change mitigation efforts (European Commission, 2011). By 2005 the United Nations had hosted ten climate change conferences with almost no progress as a result. The Kyoto Protocol had been signed in 1997 but did not enter into effect until 2005 with the omission of two huge polluters; the US and China (Victor, 2011, chapter 7). However, in this same year, the EU launched its pilot phase of the world’s first emissions trading system, a ‘cap and trade’ system designed to reduce GHG emissions across Europe by harnessing the power of markets to trade emission allowances. The EU ETS became to be the “cornerstone” of the European Union’s efforts to reduce its own emissions ahead of the rest of the world, with the ambition of leading by example as the world’s first and largest carbon market (European Commission, 2013) (Skjærseth & Wettestad, 2009).
The EU ETS works through the setting of a cap on the level of GHGs that can be emitted across industrial sectors with high carbon dioxide [CO2], nitrous oxide [N2O] and perfluorocarbons [PFC] emissions. These sectors include European energy and power, manufacturers, aviation operators within the Europe, and other high emitting business confederations. At present, the EU ETS spans 28 member states plus Iceland, Norway and Lichtenstein spanning 11,000 power installations and manufacturing plants. This means the system covers approximately 45% of the zones total emissions (European Commission, 2013).
The cap is reduced on an annual basis in order to achieve a transition to a low-carbon economy. The goals for this have been set in the EU’s ‘2050 roadmap’ which demands an 80% minimum cut in greenhouse gas emissions compared to 1990 (European Commission, 2011). Before this target can be reached, a 40% reduction target must be met as a milestone laid out in the 2030 climate & energy framework (European Commission, 2014). Allowances for GHG emissions
within the limits of the allowance cap. Theoretically, this provides flexibility for the companies involved, allowing them to choose when and how they cut their emissions in order to rely upon buying fewer allowances [increasing cost efficiency] (European Commission, 2013).
The theory is that putting a price on carbon through cap-and-trade forces companies either to incur the cost of emitting GHGs either by paying for their emissions at a market rate, or by adopting clean technology to abate emissions; avoiding the need for more allowances. The higher the price of the EU Allowances [EUAs], the stronger the signal is to invest in clean, low-carbon technologies. Essentially, the system catalyses climate mitigation through the regulation of GHGs under a market setting (European Commission, 2014).
1.3 Problem formulation & research questions
The EU ETS has been designated as the European Commission’s first-best policy for reducing GHG emissions. With this in mind it was designed to achieve the EUs commitment to the Kyoto Protocol between 2008 and 2012, with the ultimate goal of supporting the Union in achieving its 2020 climate and energy targets (European Commission, 2013). The prime goals of 2020 were to achieve a 20% cut in GHG emissions (from 1990 levels), to make 20% transition towards the use of renewables in the energy market, and to produce a 20% improvement in energy efficiency (European Commision, 2009). By and large the EU ETS is on track to do play its part in this with an 18% reduction in GHG emissions across the carbon market (European Commission, 2014).
Beyond 2020, the future of the EU ETS as the most effective tool for achieving EU climate and energy policy is becoming clouded. The exogenous shock that was the 2008 financial crisis exposed new faults in the architecture and governance of the system, in the event of a crash in global markets that reduced economic growth. Due to this event, the price of fossil fuels collapsed as a result of a decrease in demand across the industrial and transport sectors (Grosjean, et al., 2014) (Koch, et al., 2014). Simultaneously, regulators continued to issue allowances creating a surplus in the market at a time when fossil fuels had become cheaper. With these two factors combined, it became economically efficient for EU ETS sectors to revert from clean energy technologies towards using old fossil fuel base technology. EUA prices had plummeted from €30 per tCO2 to levels below €5 per tCO2, facilitating a slow-down in the EUs transition towards adopting renewables (Schopp, et al., 2015).
Moving closer towards the year 2020, the EU has looked onwards to establish milestones for achieving the ‘2050 roadmap’ goals, intensifying and extending the EUs climate mitigation efforts further. The reformulated targets require at least 40% cuts in greenhouse gas emissions (from 1990 levels, a minimum 27% share for renewable energy, and at least 27% improvement in energy efficiency by 2030 (European Commission, 2014). However, after the carbon market report of 2012, it became clear that the EU ETS was not functioning well enough to achieve any meaningful climate goals set beyond 2020 (European Commission, 2012). Despite this, the EU ETS is still set to remain as the Commissions key tool for achieving the 2030 goals [and by extension the 2050 goals and the Paris agreement] prompting serious questions about the operation and governance of the system, even with structural reforms underway.
With the decline in functionality of the EU ETS, the future of climate mitigation in the EU has become uncertain, a precarious problem if the EU wishes to continue as a ‘climate leader’ into the future to meet its own 2050 goals and map out a strategy for meeting the Paris agreement. Despite structural amendments in the form of ‘Back-loading’ [Commission Regulation No 176/2014], the surplus crisis is ongoing with EUA prices having hit a new 16 month low in February 2016 of €4.63 per tCO2 and are unlikely to recover significantly until the operation of the Market Stability Reserve [MSR] (European Commission, 2014) (EEX, 2016). The ‘Back-loading’ amendment to the EU ETS auctioning regulation is a short-term measure that reduces the volume of EUAs being auctioned in incremental steps; 400 million allowances in 2014, 300 million in 2015 and 200 million in 2016. These EUAs are withheld from being auctioned and have now been placed in the Market Stability Reserve. Effectively, this reduced the surplus of allowances on the market, driving up their price (European Commission, 2014). Whilst the ‘Back-loading’ was only short-term solution it has failed to perform as expected whilst the long-term solution to the market imbalance [the MSR] is due to start operation two years later than originally intended within the initial proposals. Meanwhile,
stakeholders are still debating the credibility of the MSR mechanisms and its finer details. The latest development to the reform process is the launching of legal proceedings by Poland to sue the European Commission for making structural amendments within a trading period that it argues will damage operational and investment plans of Polish businesses (Republic of Poland, 2015).
This series of recent events are in effect empirical evidence that underpin many of the critiques of ‘cap-and-trade’ systems as a cost-effective means of climate mitigation. Likewise, the structural reforms have carved a deeper rift between the actors committed to climate change mitigation, and those who are not; incumbent polluters (EurActiv, 2015). The problem presented in this thesis is a question of political bargaining and efficiency in resolving the carbon market’s
instability, and more importantly, in meeting the EUs 2050 climate goals. To this end, this research aims to ascertain whether the structural reforms past [‘Back-loading’] and present [MSR] can resolve the EUA surplus crisis and drive clean investment through an investigation of the political process that has eventually produced ‘Decision (EU) 2015/1814’ – the Market Stability Reserve (European Commission, 2015).
In doing so, it is critical to ascertain which stakeholders have had the most influential role in the development of the reforms, and to match the views of various stakeholders with the final structural amendments that have been established. The purpose of this is to determine whether or not the European Commission has incorporated experimentalist features into its policymaking process through recursive learning from past failures and local stakeholders (Sabel & Zeitlin, 2008) (Sabel & Zeitlin, 2012). Arguably this is a mark of progress in developing a more stable and efficient system that will ensure the reduction of the EUs GHG emissions (Van Empel, 2014). Reflexive style governance with experimental features is vital for developing an ‘in vivo’ style market, one which relies heavily upon testing new institutional arrangements to improve functionality and the achieve climate mitigation goals that have been set (Callon, 2009). Furthermore, as discussed in the previous sections of this introduction, climate change mitigation is a complex and transnational issue that requires learning, the capacity problem-solve and above all, co-operation through deliberation. These are integral features of ‘experimentalism’ which this investigation aims to disclose in the governance of the EU ETS (Sabel & Zeitlin, 2008) (Sabel & Zeitlin, 2012). Thus, the experimentalist theoretical approach has been focused upon with the aim of establishing if it exists, and to what extent it could improve the governance of the EU ETS.
Whilst preliminary research suggests that in theory, experimentalist features could prove to key for governing markets, it is also understood that other theoretical approaches may also explain the development of the reform process and the established outcomes. Policy reform of regulation within the EU is a complex process which requires the approval of stakeholders across multiple levels, which often have competing interests from each other and the European Commission. In light of this the institutional path dependency, intergovernmental and interest-group bargaining
theoretical approaches will also be used to analyse the impact of competing stakeholders upon the established policy outcomes. Combining these approaches with experimentalism will help to divulge the evolutionary pattern of the reform process to determine how the EU ETS is being recovered and in what way this is shaped by the governance of the system.
To frame the problem that has been formulated, the research question of this thesis asks: What best explains the development of the structural reforms to the EU’s Emission Trading System: interest-group and intergovernmental bargaining, institutional path dependency, or recursive learning from local stakeholders and past failures?
2. Theoretical framework & literature
This section will detail and analyse the theories and approaches that will underpin the argument throughout this thesis. Analyses of new forms of governance, experimentalism and classic theories of EU integration such as institutional path dependency and intergovernmental bargaining will provide the theoretical framework. Following this the theory behind cap-and-trade will be discussed in the context of the EU ETS so that the strengths and weaknesses of the system are exposed in light of the broader argument over the efficiency of cap-and-trade. Throughout, there will be references to key literature related to each section, but also exposure of gaps in research that this investigation intends to contribute towards closing.
2.1 New forms of governance in the EU [NFG]
The crux of this research is an investigation into the approach of governance and decision-making that best explains the EU ETS structural reform process. Focus will in part be placed recursive learning from past failures and local stakeholders which can loosely be associated with the features of ‘new forms of governance’ [NFGs]. Scholarly discussion surrounding the development of NFGs arose from the establishment of the ‘open method of co-ordination’ [OMC] instrument in 2000 as a part of the Lisbon strategy. This framework induced economic cooperation between EU member states that were unwilling to yield policymaking powers to European institutions. The purpose of the design was to reduce political deadlock in the council through intergovernmental deliberation and co-evaluation of progress. Under the OMC member states must jointly search for and establish common goals, create instruments for measuring these goals, then benchmark performance through comparative studies and sharing of best practices. Essentially, this entails learning from each other’s progress through peer review. Standing at the heart of this process is the Commission who monitor progress whilst relying on ‘soft law’ to encourage compliance (Craig & De Búrca, 2011, chp. 6)
(Kohler-Koch & Rittberger, 2006) (European Commission, 2016). Since the development of the OMC the EUs approach to governance has evolved to cope with new transnational challenges across an array of areas including the environment. Research into NFGs has expanded to analyse this evolution.
What defines NFGs and separates them from traditional hierarchical forms of governance is the faith they place in ‘soft law’. Soft laws are regulations or directives without sanctions for non-compliance; instead they coerce actors through mutual learning and socialization. In tougher situations they are enforced through the shadow of hierarchy; usually in the form of an implicit threat of public intervention such as legal action or tightening of regulations to settle the concern of non-compliance. Crucial to NFG is cooperation by higher actors units with local actors such as private organisations. Local actors are incorporated into the policy and decision-making process with the role of educating their retrospective member states on frontline issues, evaluating their proposals, or the policy goals of other high level actors. Whilst actors at all levels are included in this process of deliberation, the subsidiarity principal requires that member states hold the final vote on each legislative proposal which can lead to inter-governmental bargaining [see section 2.3] (Braun, 2009) (Craig & De Búrca, 2011, chp. 6) (Kohler-Koch & Rittberger, 2006).
The conceptualisation of ‘new forms of governance’ provides a reasonable framework from which to approach the research questions of this thesis. At best it provides an interpretation of EU governance as shifting towards the reliance upon ‘soft law’, decentralised decision making including the input of actors at all levels, and the socialisation of institutional and governmental actors with local actors (Kohler-Koch & Rittberger, 2006). Cooperating with actors at multiple levels could produce a more balanced and effective reform that is functional and has popular support. However, new interpretations of EU policymaking have been established in the form of ‘experimentalist governance’ which could provide a more relevant framework from which the problem formulated in this thesis can be investigated.
2.2 Experimentalist Governance [EG]
Sabel and Zeitlin have identified what they refer to as a new architecture of experimentalist
governance [EG] in the EU, one that closely resembles the concept of ‘new forms of governance’. EG shares many of its principals with those noted in the previous section, in particular the emphasis upon the freedom of lower-level units to enact upon policy directives and regulations in a strategy of
their choosing. Autonomy of this scale is granted on the premise that lower-level or local actors must report back to each other under a peer review system, benchmarked against each other’s performance with the objective of meeting commonly agreed goals (Sabel & Zeitlin, 2008, 2012).
Experimentalist governance, in the same way as NFGs, separates itself from ‘old’ hierarchical forms of governance through its unique theorisation of the way in which decision-making processes are beginning to evolve. The key difference is the integration of lower-level units into the
socialization process. This refers to the practice of inviting local regulators, ministries, experts or consultants [i.e. carbon market analysts] at the forefront of their fields to analyse the progress of other actors and to provide state-of the art feedback to higher-level units [i.e. the European Commission]. Representatives of interest groups may also take part in committee style events in order to provide informal analysis, diversifying the deliberation process. This multi-level integration of actors enables local units to influence the final decisions of higher-level units (Sabel & Zeitlin, 2008, 2010) (Braun, 2009). Investigating networking between multiple levels has formed an essential part of this study since the European Commission must work to understand lower level stakeholders’ expertise and opinions. Without this, it would be unwise to govern a cap-and-trade system in which stakeholders can’t trust the market or the designers of the instrument. Whilst extensive networking is crucial, there are no set institutional arrangements in experimentalist architectures, so long as lower-level units receive autonomy to achieve the stated goals [i.e. the 2050 Roadmap; see section 3.2] in return for participation in the performance/peer review process.
Perhaps the most important feature of EG for the argument of this investigation is its emphasis on the response of decision makers towards reducing the threat of uncertainty. In situations where uncertainty is persistent [i.e. carbon market instability and the unquantifiable threat of climate change], the decision-maker will work to understand the conditions that produce uncertainty and minimise them through the peer review process. This includes recursive learning from past failures, dynamic approaches to reform, and regular revision of goals, metrics and implementation methods to reflect what has been learnt through the peer review process. This process encourages actors to pursue the goals that have been set in a new environment which demands learning through difference or “joint exploration of possibilities” (Sabel & Zeitlin, 2012, pg.3). Ultimately, the EG approach to policymaking increases the capacity with which a community of actors can achieve goals, and react to reduce any uncertainty to depress any conflict between competing actor interests (Sabel & Zeitlin, 2012) (Verdun, 2012).
Experimentalist governance is a relatively new concept that already has a flurry of empirical examples to underpin its theorisations. They traverse a wide range of policy fields from finance, to
food safety, forestry, chemicals, energy regulation and environmental protection (Zeitlin, 2015). With reference to the latter domain, perhaps the most outstanding empirical example is the Montreal Protocol. The Vienna Convention for the Protection of the Ozone Layer was heralded as one of the most successful international environmental protection agreements to date, to which strength is owed particularly to its experimentalist architecture. Amongst other features, the inclusion of a Technology and Economic Assessment Panel cooperating with a local industry based Technical Options Committees helped monitor and review progress in order to suggest amendments to the protocol. The success of this system became evident through the quick results that prevented atmospheric Ozone depletion through the combined efforts of 197 states (De Búrca, et al., 2014). Thus, in relation to this research it is important to understand the advantages of EG and what it can provide for environmental policy domains that face high levels of uncertainty [EU ETS Structural Reforms]. Preliminary research suggest that traces of EG has been incorporated into the EU ETS due to its close development by the Commission in partnership with local level units such as experts from consultancies, ENGOs and private companies (Braun, 2009). However, searching for EG architecture in correspondence with the success of policy outcomes could provide new evidence on the effectiveness of EG within environmental regulation. Here lies a gap in the literature to
investigate the prominence of recursive learning from past failures and local stakeholders in the context of the EU’s first-best climate mitigation instrument, the EU ETS.
2.3 Approaches to political bargaining: interest-group bargaining [GB] and
intergovernmental bargaining [IGB]
The ultimate goal of this thesis is to determine the extent to which the structural reforms can resolve the EUA imbalance and help attain the 2050 climate and energy goals. Whilst the established outcome [the MSR] sets a benchmark from which to analyse the political decision-making process and assess the impact of varying stakeholders and institutional arrangements. In light of this, the European Commission employed extensive use of consultations with local stakeholders. Each of these stakeholders has its own agenda that may be different from that of the European Commission, Council or Parliament. Thus, lobbying is likely to be present as local actors bargain to a produce public good [a functional EU ETS] that generates a good return for the political and financial investment (Tollison, 2001). In order to understand the effects of local actors, the interest-group bargaining [GB] approach will be applied to provide a framework from which to analyse the
GB in many cases is likely to manifest in similar policy discussions as EG where local stakeholders are keen to bargain over their views throughout the deliberation process (Cutcher-Gershenfeld, 2014, chp. 6).
Cutcher-Gershenfeld has compressed GB into 5 consecutive phases that detail the process of actors’ behaviour in negotiations, the most relevant of which are detailed here. During phase one; actors identify their own interests creating multiple plans for each whilst anticipating those of their opponents/counterparts. Phase three, actors produce initial statements defining their core interests, posing questions to other actors then co-operate to find common interests options. Phase four, actors search for mutual benefits across the range of issues. Following this, drafting of agreements begins to provide clarity over sides agreements and differences. The fifth and final phase, actors work to establish joint-implementation processes using mutually agreeable metrics for measuring both sides progress (Cutcher-Gershenfeld, 2014, chp. 6).
To date, GB has not yet been used to analyse the structural reform process which provides a gap to investigate and present empirical findings on the impact of interest-group bargaining.
However, research suggests that within the EU interest-group bargaining is influencing policy outcomes, particularly environmental directives. Generally, interest groups will mobilize and try to align themselves with national governments; they have a permanent seat in negotiations combined with voting power. Thus, if a government shares the views of an interest-group it is in that groups advantage to lobby through government officials. However, if a government does not have aligned views with the interest group, the group may seek to directly lobby the European Council or Parliament or do so through a wider European group i.e. a European trade association or local institutions with European connections (Callanan, 2011).
Whilst GB is likely to be present, the co-decision procedure means the European Council have to agree with the European Parliament and any amendments they have made. In effect, the Council makes the final decision on whether or not an amendment is inscribed into law. Therefore the intergovernmental bargaining approach provides insight into the behaviour of member states such as Poland who have recently launched legal proceedings to sue the Commission due to its dissatisfaction with the early start date to the MSR [2019 as opposed to 2021] (Republic of Poland, 2015). In the context of the EU, intergovernmental bargaining theory is centred on member states and their ability to influence the policy outcome by pushing their agenda through the deliberation process. Essentially the agenda of each state reflects its domestic structure. States with similar preferences may align with each other if there are links between their policy goals or bargaining behaviour in the decision making procedure, but generally it is assumed that they will act through
rational choice to achieve what is best for their nation’s interests when negotiating EU legislation (Saam & Sumpter, 2009).
A central assumption of this theory is that political infighting or socialization between member states can shape the final policy outcome. Member states are aware of the commissions influence in policy implementation and seek to alter this in order to restrict the Commission from commanding member states (Skjærseth & Wettestad, 2010). After reviewing the Commission’s proposals, state representatives will often strike a deal with the Commission to agree with their proposals on the basis that particular set decision-making procedures are abided by [e.g. a re-balancing the principal-agent relationship in future agreements] (Blom-Hansen & Brandsma, 2009) (Thatcher & Coen, 2008). The intergovernmental approach has been applied to EU ETS reform during previous phases. For example, Eastern European member states have been found to have
significantly shaped the policy outcome of reform processes during the early pilot phases [2005-2007 and 2008-2012]. However, there is a gap for using this approach to analyse the recent
structural reforms that have produced the ‘Back-loading’ and MSR amendments, where there is lack of literature covering the new reforms (Skjærseth & Wettestad, 2010).
2.4 Institutional path dependency [IPD]
The EU is constantly evolving; it is has not yet departed fully from ‘old’ hierarchical forms of governance. Furthermore, despite a movement towards NFGs and EG across EU policymaking, the European Commission remains a fundamental designer and coordinator of policy within the structure of the European Union. Thus, processes of reform may occur in path dependent ways as old institutional structures such as the European Commission and Council continue to mould or even restrict the policy strategies of new interest groups [e.g. local stakeholders and experts]. Using a historical institutionalist approach will allow for analysis of political outcomes via actors rule abiding or interest maximising behaviour as opposed to recursive learning through past failures and local stakeholders, features of EG (Thatcher & Coen, 2008) (Della Porta & Keating, 2008, chpater 7).
With regard to the EU regulatory space, historical institutionalism has been cited as the most fitting approach for detailing the political layering that has occurred through the timescale of
reforms and debates that have taken place. Thatcher and Coen argue that new institutions [rules of law/structural arrangements] tend to be an extension of the old with added enhancements since existing actors do not wish to concede power to new competing actors. Therefore they are likely to
be opposed to radical new institutions [e.g. structural reform options] that may alter the balance of power despite having the opportunity to solve past policy failures, this is often referred to as institutional path dependency [IDP] (Thatcher & Coen, 2008).
2.6 Cap-and-trade systems, their strengths and weaknesses
This section builds upon the brief introduction to cap-and-trade found in section 1.2 by analysing the deep range of literature discussing the theory underpinning cap-and-trade, its strengths and
weaknesses. Generally speaking, there are two prime instruments for encouraging climate mitigation; economic instruments [e.g. market systems such as cap-and-trade] or regulatory instruments [e.g. directives that demand the adoption of particular technologies or practices]. Theoretically, price based economic instruments such as cap-and-trade provide the incentive for companies to invest autonomously in clean technologies in order to avoid incurring economic costs. Conversely, regulatory instruments are intended to command control of companies’ emissions, performance or technology standards. This reduces the level of autonomy afforded to companies when working towards regulatory goals (O'Donnell, 2012)(Bergek & Berggren, 2014).
Markets are increasingly being exploited as an economic instrument of choice. They have strong qualities that have produced rapid economic and social transitions across the world in a short period of history. On the down side, externalities such as the environment have been neglected for generations, exposing the weaknesses of their design. However, one solution to the shortfalls of markets is to harness the power of the market itself through a re-design of the socio-technical structures and regimes from which they have been produced (Callon, 2009) (Bergek & Berggren, 2014). Cap-and-trade is an example of this, first conceptualised in the 1970’s as solution to air pollution in the U.S. it was eventually tested in 1977 as a part of the Clean Air Act (EPA, 2016). Since their conception, cap-and-trade systems have been employed across the globe from the EU ETS to the California, Tokyo, Korean and Chinese Cap-and-Trade programs; all of which are market instruments to reduce GHG emissions and catalyse ecological modernisation. Now that the Paris agreement has been adopted at the COP21 negotiations, cap-and-trade systems are likely to be adopted in greater numbers across the globe in a bid to abate climate change (ICAP, 2016).
The EU ETS is a pioneering experiment that takes a step beyond the rudimentary design of the clean air act or laboratory testing of markets. The EUs Emissions Trading System is an ‘in vivo’ experiment that has been founded and operated using a trial and error based learning system [learning through each new time phase]. Each phase of the system is monitored and reviewed in an
experimental approach with the aim of developing a system that increases in cost-efficiency and mitigation effectiveness. The very architecture of the EU ETS has been designed to be experimental with fixed review dates and temporary tests. Theoretically this approach should reduce uncertainty in the market through deliberation, learning and progressive results (Callon, 2009) (MacKenzie, 2009). Despite the experimental nature of the EU ETS, it is argued that the governance structures operating these systems are still “cruelly lacking” in leadership that needs to be critical, impartial and willing to be remain open to novel questions or views (Callon, 2009: 2). This is arguably more important than the features of a market itself; the way in which it is operated, governed and reformed. This argument supports the aims of this research to investigate recursive learning from past failures and local stakeholder engagement within the reforms.
Across EU ETS sectors the Union has achieved an 18% reduction in GHG emissions relative to 1990 accompanied by a 13% rise in the share of renewables in 2012 (European Commission, 2014). Additionally, results show that the system has produced a significant increase in research and development in relation to projects for ETS sectors [Carbon Capture Storage being the biggest breakthrough]. Another advantage of the EU ETS is that having an internal market with a Union wide carbon price cuts out disparities that would occur between states due to individual national policies that could create a ‘two-track’ Europe that develops at different speeds (Egenhofer, et al., 2011). Overall, the most prominent success of the EU ETS has been in disseminating established clean technologies to reduce GHG emissions across industrial sectors without free permit allowances (Bergek & Berggren, 2014).
Regardless of the strengths of cap-and-trade, it is by no means the ‘silver bullet’ in the battle against climate change. Theoretically, they have powerful benefits as discussed, but on the flip side they are accompanied by a series of weaknesses some of which are inherent and immutable. Sabel and Simon provide a good overview of the most prominent weakness, the first of which is the issue of GHG regulation. Emissions of GHGs can be measured effectively since it is known through scientific studies how many of each GHG compound can be expected to enter the atmosphere through which polluting activities. However, what cannot be calculated with high accuracy is the level of risk that each GHG will carry towards the environment due to the labyrinth of externalities caused by air pollution. In effect, this undermines the validity of carbon pricing and the setting of GHG reduction goals (Sabel & Simon, 2011) (IPCC, 2014). This is a particular problem if the EU wishes to achieve its 2050 goals since they can only serve as approximate targets as opposed to being definitive goals that can be measured and monitored accurately.
Secondly, market regulators must calculate the ancillary costs of GHG mitigation by second guessing the scale and damage that could be caused to the environment by substitute pollutants. These substitutes may be adopted by companies in place of the regulated ones [CO2, N2O and PFCs]. Empirical evidence of this could be witnessed in 2006. EUA prices crumpled as a result of regulators setting the aggregate emissions target too high after miscalculating the ‘business as usual’ emissions scenario. Resultantly the market price collapsed after regulators sent out the wrong price signals (Sabel & Simon, 2011).
Thirdly, and perhaps most importantly, it remains unclear how potent a tool cap-and-trade systems can be at generating ecological modernisation or transfers of new clean technologies into the market. Due to the complex entanglement of renewable technology subsidies, fossil fuel taxes and emissions trading, it is extremely hard to separate the effects of cap-and-trade from those of other competing climate change abatement instruments (Skjærseth & Wettestad, 2010). There is little empirical evidence to suggest that market-instruments are the superior option when compared to environmental compliance instruments that demand clean technology transfers, in fact some evidence suggests they are inferior (Sabel & Simon, 2011) (Bergek & Berggren, 2014). Furthermore, it is argued that without the inclusion of the general public [individual consumption] from cap-and-trade systems, it is harder to transfer small scale local technologies to make additional
improvements to abatement (Sabel & Simon, 2011).
2.7 The Market Stability Reserve
Central to the second research question of this study is the market stability reserve. This automatic mechanism has been designed as a long-term solution to the structural imbalance of EUAs. Whilst this mechanism is yet to be deployed, there is already a wide body of literature discussing its strengths and weaknesses, all of which have critical effects upon the functionality of the EU ETS.
The MSR is an automatic quantity-based mechanism that removes EUAs from the market based upon an upper threshold of 833 million. The MSR operates with a two year gap between the trigger events [e.g. an economic recession] and the build-up of EUAs to in circulation [creating a surplus imbalance], this gap allows for ex-ante assessment of the trigger event and an ex-post analysis of its implications upon the future of the market. When the upper threshold of EUAs has been reached, 12% of allowances in circulation are removed and placed into the reserve. The same process is mirrored when there is a shortage of EUAs in the market based upon a lower threshold of 400 million allowances (Richstein, et al., 2015).
The intended effect of the MSR is to reduce price volatility however opponents of the MSR have criticised some key assumptions made by the Commission in the design of the MSR. Hedging of allowances by market actors is a pivotal process in the market which the MSR attempts to pre-empt. However data on hedging does not have to be disclosed by companies’, therefore the MSR can only react to hedging based upon presumptions of market actors behaviour. In reality this could lead to a disconnect between the real hedging behaviour of companies’ versus the Commissions predictions. The end result of this could be a slow reaction by the MSR leaving EUA prices too low (Richstein, et al., 2015). It is also argued that the MSR will not increase the environmental effectiveness of the EU ETS, it will only prevent it from failing, reducing the uptake of carbon intensive activities (Acworth, 2014).
Despite critiques of the reform, economists maintain that the MSR has the ability to enable the EU to achieve its 2050 climate goals providing other areas of the EU ETS are tweaked to support the MSR such as the linear reduction factor [LRF - the absolute decrease of EUAs, currently set at 1.74% per annum]. Increasing the LRF number to 2.55% would increase the effectiveness of the EU ETS, this was one of the proposed options for reform by the Commission that lost to the MSR during the consultation process (Hu, et al., 2015). Ultimately, the simplicity and transparency of the MSR will provide market actors with clarity over the short-term outlook of the carbon market (Acworth, 2014).
2.8 Section summary; a gap for new research
To conclude, there is a breadth of research analysing the properties, strengths and weaknesses of cap-and-trade systems, including the EU ETS. Nevertheless, there is an acute lack of research investigating the institutional arrangements of the EU ETS moving into phase three and four [2013 and beyond]. Here lies a gap for analysing the governance of the system through the application of intergovernmental bargaining, institutional path dependency, interest-group bargaining and EG. Furthermore, within the literature there exists varying views of the MSR, its capacity to stabilize the market and reduce GHG emissions. Parallel to questioning the governance of the EU ETS, critiques of the MST open up questions over the policy outcomes of the structural reform process as well as the process of reform itself. In order to close the research gap, this thesis will provide a renewed
overview of the EU ETS and the way in which it will continue to operate into the future in light of the 2050 climate and energy goals.
3. Methodology
Outcome-oriented process -tracing is the preeminent method of choice in this study, used to track the timeline of developments throughout the EU ETS structural reforms to explain the outcome. Within-case analysis has helped to highlight and understand the causal relationships between the various actors. In particular it examines their preferences for particular policy amendments and the outcome of their interactions with other co-operative/rival actors on the final policy establishments by the Commission. Observations of political events recorded and published by the European Commission such as the release of reports, position papers and consultations have been matched up with changes to policy proposals and amendments to EU directives. This was carried out in
chronological order to trace key actors impacts upon the structural reforms in order to determine which stakeholders have played the most significant role in altering the MSR design process. It also builds an understanding of how the final design of the reforms matched with actors preferences in the context of achieving the EUs 2050 goals. Ultimately this has helped determine which theoretical framework- intergovernmental and interest-group bargaining, institutional path dependency, or recursive learning from past failures and local stakeholders’ best describes the outcome of the structural reform process (Beach & Pedersen, 2016) (Tansey, 2007).
Whilst political documents have formed the backbone of the study, tracking the timeline of political/technocratic movements or release of actor’s opinions, elite interview data has
consolidated the information from this data through the following approaches. Firstly, they’ve been utilised to triangulate the connections between various policy documents, academic literature and the personal views of each interviewee to cross-check and reconstruct events throughout the reform process. Secondly, they have established in greater detail the attitudes and beliefs of different competing actors, enabling the research to highlight the motives of actors and the outcome of their influence. Thirdly, elite interview data has provided wider context to the actions and attitudes of large political groups or stakeholders, this is crucial given the sheer number involved in the reform process who could not be investigated (Tansey, 2007). This enables the researcher to make
inferences about actors whose views may not otherwise be known, particularly in the case of the DG CLIMA who have explicitly declined to comment on any issues outside of what has already been published on their website.
A purposive sampling approach has been used to select elite interviewees from a
pre-defined list of actors; the DG CLIMA, ITRE, ENVI, permanent representatives of the European Council, carbon market experts and local stakeholders such as ENGOs and trade associations. This enables targeting of the most relevant actors who have remained close to the structural reform process or
hold a particularly great interest in the final amendments due to political or economic reasons. To achieve a representative sample of the actor population, interviewees have been chosen from all ends of the political spectrum based upon their public opinions of the MSR, proximity to the design of the MSR [carbon market experts] and availability for interviewing (Tansey, 2007).
3.1 Data
The structural reform of the EU ETS has largely been a deliberative decision-making process led by the European Commission, for which key official policy documentation is published online by the Commission on its Climate Action website. This includes research, policy proposals and
amendments, impact assessments and legal directives will be used to trace and analyse the
Commissions learning and declarations. Some policy documentation may have remained undisclosed by the commission; these include initial designs for reform produced prior to expert consultation. Similar documentation types to those published by the commission have been used to interpret and detail the position and role of MEPs and Council members involved in the reforms.
In conjunction with this, the Commission’s consultation process with EU ETS stakeholders requires that all organisations that have provided feedback upon each proposal have their position paper published online. These have been analysed to add depth to the study by detailing the viewpoint of local non-governmental and industrial actors.
Expert interviews have been used to triangulate the knowledge gaps between the selection of documents, and to investigate the deliberation process between actors. The interviewees are high ranking representatives of organisations who have been involved at varying different levels and stages of the reform process from ENGOs, trade associations and carbon market consultancies employed as frontline ‘experts’ in the reform process. Unfortunately the European Commission declined a request for interview due to the ongoing political sensitivity of the reform process, as well as a number of MEPs who were contacted, including the rapporteur. As a result, the views expressed in this thesis largely represent those held by local stakeholders through their interactions with various European institutions, representatives or interest groups. Below is a list of the interviewees that provided data for this research, including their in text citations.
(Interview 1, ENGO) – CEO & Founding Director of the Change Partnership and former senior associate at E3G – role in the structural reform process: engaged in two public reform consultations on the ‘Back-loading’ and MSR amendments, and led a coalition of market stakeholders for reform of the EU ETS.
(Interview 2, energy trade association) – Environment Consultant for an energy trade association – role in the structural reform process: engaged in two public reform consultations on the ‘Back-loading’ and MSR amendments, interviewees organisation has an ongoing working relationship with the its respective national government, the European Parliament and, EURELECTRC trade
association.
(Interview 3, coal trade association) – Public Affairs Manager for a coal and lignite trade association – role in the structural reform process: engaged in two public reform consultations on the ‘Back-loading’ and MSR amendments, also has an ongoing working relationship with DG CLIMA. (Interview 4, expert) – Founder and Head of Market Analysis at a carbon market intelligence organisation – role in the structural reform process: engaged in the ‘expert meeting on EU ETS structural reform: Introduction of a market stability’ on 25/06/2014, has an ongoing working relationship with DG CLIMA.
(Interview 5, expert) – Head of Applied Research at a ‘new finance’ company – role in the structural reform process: engaged in the ‘expert meeting on EU ETS structural reform: Introduction of a market stability’ on 25/06/2014.
(Interview 6, policy analyst) – Director of the Irish National Economic and Social Council – relation to the EU ETS: has researched and published an investigation into the performance of carbon pricing mechanism.
4. The 2050 roadmap and the EUA surplus imbalance
This section outlines the origins of the structural reforms process that provide a crucial backdrop to the amendments of the EU ETS. Firstly, through analysis of the European Commission’s 2050roadmap which has become the end-goal for the EU’s climate mitigation efforts, of which the EU ETS has been designated as the first-best instrument for achieving this. Secondly, it will briefly explain and analyse the cause and extent of the EUA surplus crisis that has led to a severe structural
imbalance of allowances. Ultimately this juncture prompted the need for emergency reform of the EU ETS in order to meet the goals of the 2050 roadmap.
4.1 Defining long-term goals for the EU ETS: the 2050 roadmap
The first political juncture to spark movement towards structural reform began in the aftermath of the 2050 roadmap consultations. Amidst the EUA surplus crisis, and in the light of pledges at COP15, the European Commission [COM] began to design a long-term framework to help tackle the issue of transnational climate change mitigation [see section 1.1]. After consulting stakeholders at multiple levels, they produced a ‘Roadmap for moving to a competitive low carbon economy in 2050 - (08 Mar 2011)’ (European Commission, 2011). The 2050 roadmap was intended to provide the necessary cuts in GHG emissions for the EU to play its own part in keeping global temperatures below a fatal 2 degree rise (IPCC, 2014).
Central to this communication was the emphasis upon transitioning towards becoming a competitive low-carbon economy. The approach is that the EU ETS [amongst other instruments] could drive investment in clean energy, improving energy efficiency to make a low-carbon transition across the Union, particularly in the power sector. The key target for emissions was set at a Union wide reduction of 80-95% of GHGs compared to 1990 levels. Milestones for this long-term goal were set at a 25% reduction by 2020, 40% by 2030 and 60% by 2040. This communication was bolstered by transport and energy efficiency frameworks to help facilitate these goals (European Commission, 2011).
At this point in time the COM identified in its roadmap the critical need for both a “sufficient carbon price signal and long-term predictability” within the EU ETS in order to achieve the 2050 targets. This was the preliminary signal by the COM that review of the system may be necessary, however, at this point in time it was only suggesting that existing EU ETS mechanisms should be “revisited” as opposed to the creation of radical new ones (European Commission, 2011: 7). The foremost suggestion made by the COM was for measures that include “recalibrating the ETS by setting aside a corresponding number of allowances from the part to be auctioned during the period 2013 to 2020”, this would be imperative for improving the energy and cost efficiency of the EU ETS (European Commission, 2011: 11). Nevertheless, at this point in time there were no suggestions to initiate debate with stakeholders.
During the roadmap consultations, a frontline environmental non-governmental
organisation [ENGO] called E3G formed a coalition of local stakeholders who lobbied the European Parliament in an attempt to adopt stricter emissions reduction targets as a part of the roadmap. Despite the efforts of local stakeholders to amend the COMs proposal, the parliament rejected the proposed 30% cut in emissions, settling for a less ambitious 25% (Interview 1, ENGO). Furthermore, the Council of Ministers rejected the roadmap entirely after Poland’s environment minister vetoed the proposal stating “we cannot agree to anything that would directly or indirectly allow for higher emission-reduction goals in the near future” (Reuters, 2012). Ratcheting up GHG reduction targets and shortening the timescale for achieving them could have damaged the Polish economy which relies upon Coal for 90% of its electricity production (Reuters, 2012). Poland’s veto was an early indication of intergovernmental bargaining in the run up to the reform process, since Poland halted the commission from converting its goals from ‘soft law’ into a directive.
Notwithstanding this setback for the COM and local stakeholders, the COM kept the 2050 roadmap as an informal climate goal for member states to aspire towards achieving. Regardless of this, the Paris agreement effectively solidified the gravity of these goals granting the EU greater weight in employing the ‘shadow of hierarchy’. The agreement between 200 states was as created a legally binding framework demanding that global temperatures must be capped at 2 degrees or ‘well below’, effectively this runs with parallel ambitions to the goals of the 2050 roadmap (UNFCCC, 2015).
4.2 A milestones for the 2050 roadmap: the 2030 framework
Following the creation of the 2050 roadmap the COM began designing a framework for the medium term to ensure that the 2050 targets could be met. To this end, “A policy framework for climate and energy in the period from 2020 to 2030” was established as a directive in 2014 with binding targets to - “provide regulatory certainty as early as possible for investors in low-carbon technologies, to spur research, development and innovation and up-scaling and industrialisation of supply chains for new technologies” (European Commission, 2014: 3). The 2030 framework builds upon the goals of its predecessor [the 2020 framework] with the aim of using the EU ETS as the prime instrument for achieving the following goals by 2030:
At least 43% cut in EU ETS sector emissions compared to 2005
At least a 27% increase in the share of renewables within EU energy consumption
The framework sets a binding target at EU level to boost the share of renewables to at least 27% of EU energy consumption by 2030.
A review of progress towards attaining this target in 2020
The 2030 framework feeds into the 2050 roadmap as a milestone with experimentalist feature such as a mandate for recursive review of progress in 2020 in order to reach each and even increase the binding targets [from 27% to 30%]. The establishment of binding targets has helped to reaffirm the importance of meeting the EUs long-term goals, furthermore they heighten the need for an effective long-term reform of the EU ETS, something that the framework stressed as a necessity for achieving any targets (European Commission, 2014). However, despite this small victory by the COM, the 27% binding target is only applicable at the EU level, agreed upon as a compromise between climate mitigation leaders and laggards (Slominski, 2016). IGB has created a two-track Europe in which incumbent states are afforded leeway to fall behind more progressive states (Interview 1, ENGO).
4.3 The carbon market crisis: EUA surplus imbalance
The 2008 global financial crisis rapidly altered the price of EUAs as discussed [see section 1.3], arguably it was the most dominant factor in the price collapse (Grosjean, et al., 2014) (Koch, et al., 2014) (Interview 3, coal trade association) (Interview 5, expert). Between 2008 and 2011, 8171 million allowances were pumped into the EU ETS when it had been estimated that only 7765 million tonnes CO2 equivalent were required. By 2012 the surplus had stacked up to 955 million EUAs, meanwhile the supply of allowances was mandated to continue at a period when demand had hit at an all-time low [due to the financial crisis], this shattered the price of EUAs [see below] (European Commission, 2012).
[Figure 1: Timescale of EUA price drop (European Commission, 2012: 5)]
By 2020, it was forecast that the surplus of EUAs would have built up to approximately 2 billion. This could only be corrected with structural reform since the regulatory provisions stipulated that the supply must rise throughout phase 3 [2013-2020] to raise revenue towards research and development for carbon capture storage, which would support the energy efficiency of the fossil fuel sector (European Commission, 2012).
5. Short-term structural reform of the EU ETS:
‘Back-loading’
This section provides the first of a two part analysis of the structural reform process. The central focus is upon the development of “Commission Regulation EU No 176/2014” – the 'Back-loading' amendment to Auctioning Regulation (European Commission, 2014). The aim of this empirical chapter is to analyse actors’ influence upon the design of the amendment, the relative success of the established outcome, and the direction in which the reform process headed next [towards the creation of the MSR]. The following approaches have been used to reach this objective; interest-group and intergovernmental bargaining, institutional path dependency, and recursive learning from past failures and local stakeholders [EG]. Combinations of policy documents and interviews have been used to trace the process of reform, pointing out key junctures in chronological order. Analysis of these junctures has been provided along the way to construct a narrative for the conclusion.
5.1 Initiating preliminary deliberation of EU ETS structural reform
After the failure of the COM and local stakeholders to get approval of the 2050 roadmap, the ENGOs turned their focus towards reform of the EU ETS in order to advance efforts in tackling climate change within the EU. At this point in time the efforts of the COM in tackling climate change had stagnated after the rejection of its roadmap. By focusing upon the EU ETS as opposed to the COMs broader climate policies, frontline ENGO and environmental campaigner E3G gained large support from the private sector in its new mission to lobby for reform of the system, which was largely failing in the wake of the EUA surplus imbalance. One interviewee suggested that part of the reason for the failure of the roadmap discussion to secure long-term goals was due to the hostility the coalition faced from other private actors of lobbying of the parliament and MS by the Industrial actors. Many of these corporations simply could not see any impacts on their business model of the 3050
roadmap due to the uncertainty surrounding the targets of the proposal. Instead, it was agreed that targeting reform of the EU ETS would be more important. A new coalition of local stakeholders named ‘Friends of the ETS’ was setup by E3G to lobby on this issue, consisting of energy sector giants such as Shell, E-on and EWEA (Change Partnership, 2012) (Interview 1, ENGO).
Looking a step back in time, E3G investigated the COMs communication - "Analysis of options to move beyond 20% greenhouse gas emission reductions and assessing the risk of carbon leakage" [26/05/2010]. Inside this communication E3G identified a suggestion by the COM of a possible option for reform of the EU ETS in order to improve functionality which involved - “Recalibrating the ETS by ‘setting aside’ a share of the allowances planned for auction”; an early reference to utilising the concept of ‘Back-loading’ (European Commission, 2010: 7). Theoretically this entailed removing EUAs from the market at a faster rate to reduce the surplus and increase the market price of allowances (European Commission, 2010). Despite the COM alluding to the notion reform with suggested options back in May 2010, they failed to initiate debate with stakeholders leaving the surplus crisis to continue (Interview 1, ENGO).
Having received the backing of ‘Friends of the ETS’, E3G begun to build a campaign to set aside or remove EUAs from the market in order to cancel them in the future. At this point in time the COM was “fundamentally weak and slow”, they were worried about creating a political upheaval that could upset any party of stakeholders (Interview 1, ENGO). This statement alludes to traces of IDP and IGB; essentially DG CLIMA was concerned with changing the structural operation of the EU ETS since this would involve a fundamental change in the way allowances are bought, sold and removed from the market. Recalibrating the ETS would be a critical market intervention, one that
was always likely to have been met with strong opposition from incumbent anti-reform actors [i.e. Poland and Hungary] (Interview 1, ENGO) (Interview 2, energy trade association).
Under political pressure from ‘Friends of the ETS’ the Directorate-General Climate Action [DG CLIMA] of the COM launched a review of the ‘auction time profile of the EU ETS’ in April 2012 in order to analyse the imbalance between the supply and demand of allowances (European
Commission, 2012). After establishing the weaknesses of the EU ETS affecting the carbon market, DG CLIMA finally launched a public discussion on the options for structural reform in its ‘Consultation on review of the auction time profile for the EU ETS’. This was the first juncture in which local
stakeholders were formally invited to provide feedback on DG CLIMAs options for structural reform [amendment to Regulation (EU) No 1031/2010 (Auctioning Regulation)]. The victory of Friends of the ETS over the COM shows that interest-group bargaining played a foundational role in initiating discussions of structural reform. This happened through the collective efforts of local stakeholders do define mutual goals [improving price signals trough reform] and acting upon this agenda to secure them (Interview 1, ENGO) (Interview 2, energy trade association).
Explicitly, the ‘Back-loading’ amendment was designed as a temporary solution to the EUA imbalance, in this sense the market impact of the first reform was never going to be high. Implicitly, the reform was pushed through by interest-groups including Friends of the ETS to “drive a very big wedge through a political system” (Interview 1, ENGO). The intention of this as to send a political message from local stakeholders to the COM to signal that reform was not only necessary, but also winnable in the political process, despite the COMs fears of having its reforms rejected by the council due to IGB (Interview 1, ENGO) (Interview 2, energy trade association).
Prior to this the COM had effectively been “boxed in” by opposition to reform by member states and trade organisations arguing that because the EU was on target to achieve its 2020 goals, there was no need to take further action. Poland and the coal industry in particular were the most vocal actors articulating this opinion (Interview 1, ENGO) ) (Interview 2, energy trade association). Opposition towards the ‘Back-loading’ amendment from the coal industry was particularly explicit- “the market is meant to determine the price, if you change this it is not a market anymore, it is almost a tax - you don’t just start changing it because the price doesn’t make you happy - you just leave the market how it is” (Interview 3, coal trade association).
Thus, bargaining with the COM to initiate ‘Back-loading’ discussions was “priceless” in that it helped “build confidence” in DG CLIMA, enabling them to progress on towards proposing radical long-term structural reforms i.e. the MSR. As a result, the MSR was established quickly off the back
