51
4 The European CO
2
emissions trading system
In this chapter we look at the negative interaction between the European CO
2
emissions trading system and the national energy saving policy. We also propose options to mitigate the negative interaction.
4.1 Interaction between CO
2
emissions trade and other policy instruments
If several policy instruments are directed at the same goal, they interact with each other. Within energy and climate policy, there is a negative
interaction between the European CO
2
emissions trading system and all other policy instruments to reduce the CO
2
emissions or increase the energy efficiency of energy intensive industries. This phenomenon is
discussed in several studies Aalbers et al., 2007; Court of Audit, 2007; Daniëls et al., 2010. In an audit of 2007 we pointed out that the
introduction of the emissions trading system had weakened the effectiveness of renewable energy policy clean energy and energy
savings Netherlands Court of Audit, 2007. Organisation of emissions trading
The CO
2
emissions trading system is designed to reduce CO
2
emissions without prescribing when and how companies must do so. The system
allows companies to opt for the most cost effective measures for their own business. A company can satisfy the emissions trading requirements
in a variety of ways: by buying more emission allowances andor by reducing its own CO
2
emissions. CO
2
emissions can be reduced through energy savings more efficient energy management, by using less
energy, by switching to low-emission energy generation renewable energy, by capturing and storing CO
2
, andor through fuel substitution
e.g. gas instead of coal. The government has introduced other, usually financial, incentives for nearly all these options.
52
Effect of grants in the manufacturing sector In many cases, the use of these options frees up emission allowances.
Sooner or later, the companies and power stations that buy these allowances will use them. The CO
2
emissions that were initially avoided thanks to Dutch energy saving measures are thus produced at another
time and probably in another EU country. Owing to this interaction, all government instruments and measures to reduce CO
2
emissions in sectors participating in the emissions trading system have only limited
effect at European level. The initial energy saving and associated CO
2
reduction is largely negated. In this light, the use of grants to encourage energy savings at companies participating in the CO
2
emissions trading system is inefficient. Their only effect is to make energy savings more
attractive than other CO
2
reduction measures, such as the use of renewable energy and innovative techniques. There is little point in
providing grants to encourage energy savings in the manufacturing sector unless there are compelling reasons in favour of energy savings rather
than other ways to reduce CO
2
emissions. The efficiency of grants to encourage the use of renewable energy in
sectors not participating in the CO
2
emissions trading system is also open to question. If the policy reduces electricity consumption, power stations
will generate less electricity and CO
2
allowances will become available that other participants can buy. CO
2
reductions in the non-participating sectors are negated by extra CO
2
emissions in the participating sectors. From this angle, too, it is inefficient to use grants to encourage renewable
energy unless there is a compelling reason to do so, e.g. the European obligation to increase the share of renewable energy.
In practice, the situation is more complicated. Until 2008 the allowances had been so generous that the intended market forces did not influence
the trading system. If specific energy saving policy had not been introduced, the Netherlands energy savings and CO
2
emissions would have been worse than they are now. Owing to the economic recession
since the end of 2008 and the resultant decline in manufacturing output, the emissions ceiling has been too high and the price of a CO
2
allowance too low to serve as a strong incentive for innovation. With the price of a
CO
2
allowance being so low, there is little incentive for the energy intensive sector to cut its consumption or use cleaner fuels.
A second uncertainty regarding the instruments effectiveness is whether participants in the CO
2
emissions trading system have the knowledge to benefit from all the options available to reduce their emissions or comply
with the obligations of the trading system in another way. Our company
53
survey see chapter 5 found that only the largest companies more than 3,000 employees thought they had the necessary knowledge.
4.2 Ways to mitigate the negative interaction
In our 2007 audit report on the implementation of the CO
2
emissions trading system, we recommended that the government review the cost
benefit ratio of each instrument to reduce CO
2
emissions and reconsider its use Netherlands Court of Audit, 2007. In 2009 we investigated the
follow-up to this recommendation Netherlands Court of Audit, 2009a. Although the Ministries of EZ and VROM recognise the interaction and its
consequences, the government has not reconsidered the policy. Yet measures can be taken, separately or jointly, to resolve this problem.
1. Focus energy saving policy on energy consumption outside the emissions trading system
A first option is to sharpen the policy focus on energy consumption not subject to the emissions trading system. This consumption comprises a
the gas consumption of manufacturers that are not subject to the CO
2
emissions trading system, b the gas consumption of the household, trade, services and public sectors, and c the energy consumption of the
transport sector. 2. Focus energy saving policy on long-term effects innovations
A second option is to apply the policy instruments used in the sectors participating in the CO
2
emissions trading system to develop innovations that are viable in the long term, for example in the biobased economy or
alternatives to fossil fuels. At present, CO
2
emissions trade encourages measures that are viable in the short term.
3. Lower the CO
2
emissions ceiling A third option is to strengthen the operation of the trading system to
make emission allowances so expensive that companies invest in meaningful energy efficiency improvements and in renewable clean
energy. This can be achieved by lowering the emissions ceiling before the next trading period after 2012 or by significantly cutting it for the
period after 2020. This option would require a decision at European level. As a member state, the Netherlands can seek support for this option. If
a decision is not taken at European level, the government could buy up emission allowances and take them temporarily out of the market.
This expensive option would require cooperation among several European countries.
