Reformed carbon market must no longer fund coal

Financing the transition

As the Emissions Trading System (ETS) reform enters its crucial trialogue phase, it is up to the European Parliament to fight its corner and ensure that future funding only goes towards projects that contribute to the clean energy transition, writes Joanna Flisowska.

Joanna Flisowska is coal policy coordinator at Climate Action Network (CAN) Europe.

This op-ed was first published on Euractiv on 3 April 2017

The reform of the EU Emissions Trading Scheme (ETS) for the coming decade will enter the final stretch tomorrow (4 April), when representatives of the European Parliament, the Council of Ministers and the European Commission meet for the first informal ‘trialogue’ to negotiate an agreement on the redesign of the EU’s main tool to curb carbon emissions.

The scheme is in dire need of improvement in order to remain relevant. Tackling the large surplus of unused allowances and increasing the annual reduction rate are crucial elements of such a repair.

Furthermore, the provisions designed to help Central and Eastern European countries clean up their energy systems remain a major sticking point in the discussion on the ETS reform. This is because the redesign offers a unique opportunity to finally exclude investments in the modernisation of coal power plants from the ETS transition funds. But those who profit from the current subsidies for coal power put up a fight to defend the status quo.

Back in 2013, when the 3rd phase of the ETS started, poorer countries from Central and Eastern Europe asked for special treatment to smoothen their path to Europe’s low-carbon economy.

Hence why the Article 10c derogation was introduced. This provision allows Central and Eastern European countries to give allowances for free to power plants under the condition that the countries invest preassigned monetary value in the modernisation and diversification of their energy systems.

The estimated value of these free allowances to be handed between 2013 and 2019 is €12 billion.

Article 10c was designed as a transitional derogation that was supposed to end by 2020. But as it has not yet fulfilled its role, the European Commission proposed to prolong it and create an additional Modernisation Fund worth 2% of all ETS allowances to boost low-carbon investments in lower income member states.

The fact that Article 10c in the current phase of the ETS is failing cannot be a surprise. The experience to date clearly demonstrates that the funds are being largely misused to subsidise fossil fuels, including coal. According to the Commission’s own calculations, in 2013, only about 10% of the investments through Article 10c were related to clean technologies or the diversification of the energy systems.

Poland is the most striking case. It is the biggest beneficiary of Article 10c’s free allowances. Between 2013 and 2020 Polish energy companies receive estimated value of almost €7.5 billion. The vast majority of these funds is being spent on subsidising coal power.

This includes Belchatow power station, the largest CO2 emitter in the EU and the most harmful plant in terms of air pollution. The subsidies also benefit coal plants that will close down by 2020.

The abuse of Article 10c has been recently nominated for the first ever European Fossil Fuel Subsidies Awards launched by CAN Europe. For about a month people from across Europe will soon have the opportunity to vote on the most hypocritical fossil fuel subsidy which stands in the way of climate action while threatening our health, environment and economies.

In its position on the new law, the European Parliament rightly recognised the need to establish eligibility criteria in order to ensure that the ETS funds are designed to truly accelerate the transition away from dirty energy.

The measures proposed by the Parliament include the crucial Emission Performance Standard (EPS) that would exclude any projects that emit more than 450 grams of CO2 per kilowatt hour from funding. This limit would phase out any support for coal power.

Now the Parliament has to defend its position in the trialogue negotiations with the Council and the Commission.

Despite the fact that a number of environment ministers, including those from the UK, the Netherlands and Germany, raised the need for stricter rules in their last debate on the ETS reform, the final compromise in the Council did not include any eligibility criteria for the ETS transition funds.

If the EU wants to be consistent with its commitments made under the Paris Agreement, all coal power plants in Europe will have to be closed down. As long as the ETS continues to subsidise coal plants instead of making them pay for their pollution, it is hard to imagine a real energy transformation.

The Emission Performance Standard must be introduced to guarantee the much needed shift of investments to sustainable renewable energy, energy savings and an upgrade of electricity grid infrastructure.

To meet the Paris commitments, we need everyone on board. It is high time to stop allowing countries to manoeuvre around obligations. Poland often takes EU climate and energy policies hostage and continuously asks for more and more flexibilities. It is a vicious circle, as granting exemptions allows to maintain status quo and therefore increases the gap to countries that are already embracing the green energy transition. And this gives Poland further excuses to stick to a coal lock-in.

Now the fate of the EU Emission Trading Scheme will be decided behind closed doors in an informal process involving a handful of people.

But once the white smoke appears, the decision on the criteria for the ETS transition funds will leave a deep mark on the lower income countries’ energy systems and will be felt by millions of European citizens. We hope that the involved lawmakers will remember that a lack of transparency does not mean a lack of accountability.