How the EU Emission Trading System works to trim freedom to serve bureaucrats and climate hysterics
 Plainly put, the European Emission Trading System (ETS) taxes shipping companies in such a way as to force them decrease pollution they emit from ships starting next year in 2024 as outlined in a recent edition of Hellenic Shipping News Worldwide.
"Numerous other countries have copied the model, notably China. However, the ETS has not always succeeded in emissions reduction," said the release from the the Grantham Research Institute on Climate Change and the Environment, which was established by the London School of Economics.
Though one of the consolation prize is that the proceeds from this de facto tax will finance the development of clean technologies, for example through the Innovation Fund.
Yet under the rubric of doing so one might instead fund an endless boondoogle funding studies that have already been studied on the environmental impact of doing nothing or doing something or even studying something else. And in the name of "sustainability" one might investigate the costs of implementing this and that or another thing. With Innovation Funds one can spend a lot of money having done little or nothing. In such a world intentions matter more than results.
In the aftermath of the 2008 economic crisis, European industrial production fell dramatically, leading to a surplus of EU Allowances (EUAs), low ETS prices and no incentive for emissions reduction. Consequently, the European Commission established a mechanism, the Market Stability Reserve (MSR), to keep the annual supply of EUAs in check.
Such comes from a document from the Grantham Research Institute on Climate Change and the Environment, established by the London School of Economics and Political Science.
Like so much of climate change material it proceeds on the unquestioned assumption that such draconian measures are necessary to forestal the ravishes of global warming. In its most extreme form, as enacted in the United States, it means the end of fossil fuel use.
The ETS works through the shopworn concept of "cap and trade". Every year, a total limit is set on the amount of greenhouse gases (GHGs) that companies under the ETS can cumulatively emit in that year.
This "cap" is reduced each year by a politically decided percentage: the Linear Reduction Factor (LRF). The cap will eventually reach zero, meaning that companies operating under the ETS should no longer be allowed to pollute.
Each tonne of emissions corresponds to one emission allowance (EUA). Companies can get EUAs either from European auctions (organised on behalf of member states) – where companies bid for a certain amount of EUAs – or from trading with other companies. Hence the system is known as "cap and trade".
In the past, some EUAs were allocated for free each year to certain sectors to mitigate the supposed risk of becoming uncompetitive as a result of the ETS and moving outside of Europe (often referred to as "carbon leakage").
Companies could use those free allowances to either comply with ETS or, if they lowered their emissions, they could sell these free allowances to other companies for profit.
But these free allowances are gradually being phased out because of their environmental ineffectiveness. Each auction requires a certain minimum amount – eg, 10,000 EUAs – to be sold. If, altogether, companies bid for less EUAs on that auctioning day, the EUAs are not sold. Larger companies tend to buy and sell allowances themselves, while smaller companies tend to get their EUAs through trading houses (aggregators).
The auctioning of EUAs takes place throughout the year. From 2024, companies covered by the ETS will have to demonstrate that they have bought enough EUAs to cover their annual emissions by September 30, as opposed to April 30 as it has been the case so far.
They will then "surrender" these EUAs as an act of compliance. Surplus EUAs can either be kept for the next year or traded. If emissions are greater than the number of surrendered EUAs, a penalty of EUR100 (US$106) is imposed for every missing EUA. The company will still need to surrender the missing EUAs the following year.
This mechanism makes sure the EUA price is at a high enough level to force companies to reduce emissions. The MSR has helped to push the ETS price up to around EUR90 per EUA, whereas the ETS price struggled to go above EUR5 per EUA from 2013 to 2017.
Similarly, while the most recent revision of the ETS improves climate ambition, the impact of the ETS is still limited due to the late phase out of free allowances and relatively low prices of fossil fuels compared to renewables, hence most sectors are subject to other climate laws alongside the ETS.
Which emissions are covered by the Shipping ETS?
The ETS will apply to 100 per cent of emissions on voyages between European ports and 50 per cent of emissions on voyages from a country outside the EU to an EU country and 50 per cent of emissions in the opposite direction.
A voyage is defined as any movement of a ship that originates from and terminates in a port of a member state and that transports passengers or goods for commercial purposes. A cargo ship will therefore pay for its emissions if it transports goods from the US to Spain, but not if it only stops in Spain only to refuel or if a vessel simply transits Spanish territorial waters without calling at a Spanish port to load or unload cargo.
The ETS will cover CO2 emissions emitted in 2024 and onwards. Methane (CH4 ) and nitrous oxide (N20) emitted in 2026 and onwards will also be included in the EU ETS. There are some specific exemptions for specific national circumstances. For example, ships travelling on ice will pay less until 2030, while voyages to outermost EU regions like the Azores or Canary Islands and ferries travelling between islands with a population of under 200,000 are also exempted.
At one time, perhaps 10 years ago, but perhaps as long ago at the 1970s when the UN's International Maritime Organisation (IMO) was known as the International Maritime Consultative Organisation (IMCO), shipowners dared to question what might be fairly called government overreach. Back then, past state mega project ambitions were measured against their outcomes.
These days few dare to question the sagacity of the dreams and schemes of the technocratic elite much less weigh the results of their restrictions and mandates. Perhaps, it is time we did so to be certain that the proposed cure is not worse than the disease, it risks. |
