The ETS mess – Denmark’s unholy alliance with the German car industry

Many people tend to see the world in a Manichean way. You’ve got the good guys and the bad guys. That’s as true within the environmental movement as anywhere else. So it is perhaps surprising to see that many environmentalists work together with unusual allies. For example, when it comes to car CO2 standards environmentalists and car drivers have the same interest; cleaner, more efficient cars are good for drivers’ pockets and for the climate. That makes the case for them almost irresistible.

But sometimes the exact opposite happens and ‘green proposals’ are hijacked by industry to undermine climate policy. Take the example of EU-ETS reform
 
For years German luxury carmakers have complained about the EU’s fuel efficiency (CO2) standards. Despite their clamouring, the EU agreed CO2 standards for 2015 and 2021. German carmakers really don’t like this and so, to put an end to this once and for all, BMW and Daimler have been touring Brussels with a ‘cunning little plan’ – to include transport in the ETS. For carmakers it would be perfect. It sounds green and pro-active; it would hardly affect petrol prices and would shift the burden of CO2 reduction to other sectors. The icing on the cake: it would give them a new argument in the discussions about standards for 2025 and 2030 – “not necessary since CO2 emissions from cars are dealt with by the ETS”. 
 
Sadly for BMW and Daimler, their ‘cunning little plan’ didn’t get too much traction. 
 
Enter Denmark, one of Europe’s few climate champions. Denmark managed to get the transport ETS idea in the draft June European Council conclusions for the 2030 climate and energy package. Denmark is worried about the ETS and rightly argues we need a higher carbon price. To push up the price in the market-based ETS you need scarcity of supply. So why not try adding an extra sector to the ETS, Denmark thought. Moreover, meeting Denmark’s non-ETS targets, in particular those for transport, would all of a sudden become a lot easier. Indeed, for Denmark it’s a way to offload the responsibility for transport emissions cuts to Europe. Smart thinking, right?
 
Not quite.
 
First of all, today’s carbon price of €6 per tonne is due to the economic crisis, the over-allocation of allowances, and, above all, political reasons. The real problem with the ETS is that it covers sectors that can absorb high carbon prices – for example, power generation – but also includes sectors where there’s a (perceived) risk of ‘carbon leakage’. Political economy dictates that carbon prices will be as high as the weakest link is seen to be able to bear and that’s exactly how it’s been with the EU-ETS. 
 
But even if, by some miracle, the carbon price would be allowed to increase significantly, it still wouldn’t do any good for transport. For example, an aspirational €25 per tonne carbon price would increase fuel prices by 6 cent. That’s far too modest to drive investments in ultra-efficient cars and cleaner fuels, let alone to lead to modal shift. 
 
Perhaps most importantly, including transport in the ETS would severely undermine successful existing policies like CO2 limits for vehicles and fuels. Carmakers could cry ‘double regulation’, claiming transport emissions had already been ‘dealt with’ once included in the ETS. 
 
So this very much looks like the kind of unholy alliance that any green should avoid at all costs. Denmark is, perhaps inadvertently, helping German luxury carmakers’ wildest dreams come true and lending credibility to an idea that could potentially be very dangerous for Europe’s climate plans.  
 
Alliances between greens and business can be a very potent force. They are proof that fighting climate change can lead to win-win situations. But, of course, this is only true if the fight against climate change gains from it. If that’s not so – and the transport ETS case is a case in point – the green partner needs to reflect carefully. Its support for the wrong idea can do a tremendous amount of damage. So in a spirit of frankness among friends, we would say Denmark has much to carefully reflect on.