The plummeting EU carbon price means that repairing the EU emissions trading system is more urgent, said Niels Ladefoged, member of cabinet for the European Commission's Climate Action division, speaking at a conference in Brussels on Tuesday.
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"Repairing the ETS is more urgent than some thought... we can see why there is the urge for the rapid adoption of EC proposals from January," he said in response to queries over an EC reaction to a plummeting carbon price.
EU Allowances collapsed to a nine-month low March 28 with prices dropping to Eur3.71/mt by around midday -- the lowest price since July 2013 -- as traders pulled the plug on long positions amid expectations that data this Tuesday would show a significant drop in CO2 emissions across the EU ETS in 2013.
Traders said the drop indicated that EU legislation that backloads 900 million EUAs from auctions over 2014 to 2016, which initially had a positive effect prices, is now not expected to have as large an impact as anticipated.
"Backloading is now a reality but it was always meant to be a short-term solution. We need to look to long-term solutions for the ETS," Ladefoged said at the conference.
"We need 2030 targets -- we need stricter targets to make the ETS credible. If the [carbon] price is so low, it has no impact on people and member states will move then to other policies," he said.
EC LOOKS TO PROTECT INDUSTRY WITH ETS REDESIGN
As the EC moves forward with its plans to redesign the ETS, it will focus on how to correct for heavy industry losses under the ETS but also within a global context, said Ladefoged.
The EC is moving forwards with plans to redesign the ETS post-2020 "soon" and will look closely at the "cross-sectoral correction factor," he said.
But a cross-sectoral correction is not going to fix making climate action competitive, said David Hone, chief climate change officer for Royal Dutch Shell.
The key elements of carbon pricing, carbon capture and storage technology and renewable energy are all critical, "but it is also a question of how we implement them," said Hone.
The emphasis should be on the lowest-cost option, he said.
Member states had chosen to take further climate action to support low carbon technologies for "a good reason," he said.
"The UK's carbon floor price is being used to deliver one CCS project," he said, but added that individual member state action may not be the policy.
"Is this really a good example for the rest of the world? Clearly there are issues that need to be addressed," Hone said.
Rising energy costs are a problem for Europe's industry but the focus of creating energy policies driving carbon reduction should not be on rising energy costs but should instead focus on other areas, such as decreasing energy intensity through energy efficiency measures and through the uptake of renewable energy, Ladefoged said.
"Energy efficiency and low carbon technology markets is a growing industry and we should take decisive action now... this is where our future lies," he said.
"We have a trade deficit in energy costs -- if we did something about it now we might be better off," he said.
Shale gas could also be a solution for Europe's low carbon energy search but not in the same way as for the US, Ladefoged said.
"Yes, shale gas is a gamechanger but Europe needs to play to its strengths," he said.
The US has seen a shale gas revolution in recent years which has impacted not only the price of gas in the US but also energy prices in Europe, due to an influx of cheap US coal which has been displaced from the domestic market there by cheaper gas.
Ladefoged said that the EC will look further in to energy efficiency this year. The EC is expected to come out with a report on energy efficiency targets post-2020 this summer.