Innovative sources of financing

Revised emissions trading system: a source of climate finance?

Just before the summer recess, the European Commission presented its proposal for the forthcoming revision of the EU emissions trading system. Its primary objective is to adapt the existing policy for the time after 2020. The proposal largely reflects the political compromise that the governments of the Member States had already made – and is correspondingly weak. The annual reduction of available CO2 allowances as of 2020 is not in keeping with the long-term climate protection goals of the European Union, the allocation of free allowances to industry has been expanded considerably over previous plans, while the issue of an oversupply of allowances is addressed at best half-heartedly.

Another hope – that strengthening the existing provisions could make emissions trading a reliable source of climate finance – will not be fulfilled by the new proposal either. While Member States currently are encouraged to spend at least 50 percent of their auction proceeds for measures in the energy and climate field, including international climate finance, no binding or otherwise reasonably reliable regulations to that effect have been put in place. Initial signals suggested that the Commission might strengthen the provisions.

Emissions trading could offer a promising option in this regard – Oxfam has proposed an International Climate Action Reserve (ICAR; briefing here, background study here) that would contain a percentage of CO2 emissions rights similar to that of the Innovation Fund foreseen in the Commission’s proposal. The ICAR auction proceeds would be transferred directly to the Green Climate Fund and thus provide a solid foundation of European climate finance based on the polluter-pays principle. Depending on how the price of CO2 develops after 2020, this could raise more than €3 billion a year that could be credited to the Member States according to a fixed distribution scheme, thus partly covering their contributions to international climate finance without competing with other development finance objectives in national budgets.

The European Union should be very interested in this, particularly in view of the UN negotiations for a global agreement to combat climate change, considering that it still faces the challenge of making concrete proposals to potential allies in developing countries as to how it intends to meet its climate finance pledges in the long term, especially after 2020. Without such alliances, the EU will once again be in a relatively isolated position in Paris. Thus marginalized, it will be able to do little to prevent the United States and China from pushing through a rather weak agreement that does not meet the EU’s expectations. The European Parliament and the EU environment ministers should take these considerations to heart when they review the Commission’s proposal this autumn.

Jan Kowalzig, Oxfam