Blog Post

Backloading – An ineffective economic measure for a good political reason?

Wednesday afternoon will see the fourth vote in the European Parliament (this time again in the environment committee) on a scheme to temporarily reduce the number of allowances available to participants in the EU emissions trading system in order to stabilise dwindling allowance prices. 

By: Date: June 19, 2013 Topic: Energy & Climate

Wednesday afternoon will see the fourth vote in the European Parliament (this time again in the environment committee) on a scheme to temporarily reduce the number of allowances available to participants in the EU emissions trading system in order to stabilise dwindling allowance prices. This is referred to as “backloading”, because the 900 million allowances that would be withheld from the market in 2013-2015 would be reintroduced in 2019-2020.

Much has been written on the advantages and disadvantages of this proposal. For David Hone at Shell there are a number of reasons to vote in favour of back-loading. First, restoring the price signal will increase market confidence, necessary to improve investment decisions (eg, in carbon sequestration projects). In more political terms, the backloading decision could boost the idea of a single EU market and could promote EU leadership on carbon trading. In fact, since 2005, many countries have followed Europe’s example and introduced an ETS system at home.

On the academic side, Neuhoff and Schopp (2013) are strongly in favour of backloading as a means to tighten the demand-supply balance in the carbon market. They argue that while a modest oversupply in the system is fine as long as enough emitting companies have to buy allowances for their foreseeable needs (hedging), the price collapses when the oversupply in the system reaches a certain level. Hence, a weak form of scarcity is essential to obtain meaningful prices.

The carbon trading campaign group Sandbag underlines that, from the UK perspective, it would be counterproductive to vote against backloading as the price disparity between the UK “Carbon Price Floor” and the EU ETS would otherwise increase to the detriment of UK electricity generators.

At the same time numerous commentators (such as member of the European Parliament Korhola) have warned that an intervention in the market mechanism could be seen as a signal of high political volatility, scaring away investors. We have argued in an earlier blogpost (Decarbonisation is no 100 metre race) and a recent paper (You’d better bet on the ETS) that the ETS is a very efficient decarbonisation policy, but that backloading does not resolve the structural issue of the ETS – the lack of long-term credibility of the system.

But beyond arguments about whether backloading is the best tool to stabilise the ETS or not, the discussion has shifted towards whether the ETS itself is an appropriate tool for cost-effective decarbonisation, and even if we can afford decarbonisation in the current economic climate. Consequently, for many commentators, backloading is not about the demand-supply situation in the ETS but s mainly a political issue (Carbon Clear, Stop Climate Change). The argument is that a negative vote on backloading will demonstrate a general distrust in the ETS. Hence, the backloading decision has been turned into a symbolic choice on the future of European decarbonisation policies (Felix Matthes).

This makes it difficult for policymakers that agree that the ETS is the appropriate tool for decarbonisation, but fear that backloading is inappropriate for improving the system.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More on this topic

Opinion

Four pillars to make or break the European Green Deal

The recipe for a successful European Green Deal is as simple as it is breath-taking: to intelligently promote deep decarbonisation by accompanying the economic and industrial transformation this necessarily implies, and by ensuring the social inclusiveness of the overall process.

By: Simone Tagliapietra, Grégory Claeys and Georg Zachmann Topic: Energy & Climate Date: November 14, 2019
Read article Download PDF

Policy Contribution

How to make the European Green Deal work

Ursula von der Leyen has proposed a European Green Deal that would make Europe climate neutral by 2050. With this Policy Contribution, the authors provide a first analysis on how to make this initiative work.

By: Grégory Claeys, Simone Tagliapietra and Georg Zachmann Topic: Energy & Climate, European Macroeconomics & Governance Date: November 5, 2019
Read article More on this topic More by this author

Blog Post

Demystifying carbon border adjustment for Europe’s green deal

From carbon leakage to “green protectionism”, the European Green Deal envisioned by the incoming Commission has many critics. But some adjustments to the deal could make domestic manufacturers more carbon efficient while simultaneously encouraging foreign producers to become more environmentally friendly.

By: Guntram B. Wolff Topic: Energy & Climate Date: October 31, 2019
Read article More on this topic More by this author

Opinion

Coming soon: a massive laboratory for ‘Green New Deals’

Green New Deals’ are not going to turn countries into ‘hermit nations’,but they are not going to turn countries into economic paradises either. They simply are tools to achieve something more basic: ensure that climate change does not compromise our life in this planet. And this already looks like a good reason for them to be well worth our time.

By: Simone Tagliapietra Topic: Energy & Climate Date: October 1, 2019
Read article More by this author

Blog Post

Questions to the First Executive Vice President-designate Timmermans

For the first time ever, a large economy will cut a path to climate neutrality by 2050 – a milestone that scientists consider to be the only sensible way to protect the world from the more dramatic impacts of climate change.

By: Simone Tagliapietra Topic: Energy & Climate, European Macroeconomics & Governance Date: September 25, 2019
Read article More on this topic More by this author

Opinion

The EU needs a bold climate strategy

Scientists report that global temperature increases must be limited to below 1.5 degrees Celsius. With global greenhouse gas emissions continuing to increase and rising temperatures driving up the frequency of extreme weather events, the world needs a greater commitment to climate policy.

By: Guntram B. Wolff Topic: Energy & Climate Date: July 19, 2019
Read article More on this topic More by this author

Opinion

Von der Leyen’s Green Deal isn’t just a plan for the environment

Ursula von der Leyen's proposal of a European Green Deal is ambitious and urgent. Not only does it aim to reduce the continent's emissions, but it also has the potential to grow the EU's economy and transform the bloc's politics.

By: Simone Tagliapietra Topic: Energy & Climate Date: July 18, 2019
Read article More on this topic More by this author

Podcast

Podcast

Deep Focus: Energy transition in the next EU institutional cycle

Bruegel fellow Simone Tagliapietra speaks to Sean Gibson in this instalment of 'The Sound of Economics', on the matter of the European energy transition and how the EU should proceed in the new institutional cycle.

By: The Sound of Economics Topic: Energy & Climate Date: July 10, 2019
Read article Download PDF More on this topic

Policy Brief

The European Union energy transition: key priorities for the next five years

The new members of the European Parliament and European Commission who start their mandates in 2019 should put in place major policy elements to unleash the energy transition. It is becoming economically and technically feasible, with most of the necessary technologies now available and technology costs declining. The cost of the transition would be similar to that of maintaining the existing system, if appropriate policies and regulations are put in place.

By: Simone Tagliapietra, Georg Zachmann, Ottmar Edenhofer, Jean-Michel Glachant, Pedro Linares and Andreas Loeschel Topic: Energy & Climate Date: July 9, 2019
Read article More on this topic More by this author

Opinion

Faut-il s’endetter pour le climat?

Jean Pisani-Ferry, soutient qu’il ne faut pas s’interdire de financer une partie du coût de la transition écologique par l’endettement.

By: Jean Pisani-Ferry Topic: Energy & Climate Date: July 2, 2019
Read article More on this topic More by this author

Opinion

EU urgently needs to reverse its climate neutrality failure

Immediate action is necessary to ensure the EU can become carbon-neutral by 2050 and thus limit global warming. The rapid rise in support of this target in the last month suggests it is attainable, but the momentum must not be lost.

By: Simone Tagliapietra Topic: Energy & Climate Date: June 28, 2019
Read article Download PDF More on this topic

Policy Brief

A strategic agenda for the new EU leadership

Memo to the presidents of the European Commission, Council and Parliament. 'A strategic agenda for the new EU leadership' by Maria Demertzis, André Sapir and Guntram Wolff is the first of our 2019 Bruegel memos to the new presidents of the European Commission, Council and Parliament. Focusing on the most important economic questions at EU level, these Bruegel memos are intended to be a strategic to-do list, outlining the state of affairs that will greet the new Commission.

By: Maria Demertzis, André Sapir and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: June 13, 2019
Load more posts