The CSU's proposal to simply cancel a small number (22Mt) of EU emissions allowances is not a plausible alternative to the proposed Climate Contribution policy. Given the current state of the EU ETS, targeted policies to deliver real emissions reductions today are more important than the indirect reductions implied by cancellation of emissions allowances.
To reduce its contribution to the growing risk of climate change, Germany is right to pursue policies that reduce its reliance on the most polluting and inefficient source of electricity. Low carbon prices and other non-price barriers mean that some of the most polluting power stations in Europe are continuing to emit at full capacity even when lower-carbon power is available. The proposal published earlier this year by the German Energy Ministry is a good way of reducing Germany's emissions and hitting its target for 2020 by increasing the costs of the oldest lignite power stations. Cancelling 22 million tonnes from the ETS does not come anywhere close to being a credible alternative.
Sandbag supports cancellation of carbon allowances as an important tool for increasing ambition in the EU’s carbon market. That being said, emissions trading should never be viewed as sufficient on its own to deliver all the actions necessary to achieve a low carbon economy.
There is currently a massive oversupply in the EU ETS and cancellation of billions of carbon allowances will be needed at some point to restore the link between the level of the cap and the fact that emissions in Europe have been lower than anticipated. However, this should not be confused with the need to introduce supplementary policies at the Member State level to avoid the continued lock-in of dirty technologies because price incentives are currently low or non-existent.
Cancelling allowances helps to ensure a tightening of the carbon budget over time, but it cannot foretell when emissions reductions will occur. It is therefore not a viable policy option for helping to meet targets expressed in terms of actual emissions by a specific point in time. It is thus inappropriate to make use of cancellation as a measure to achieve Germany’s domestic emissions target for 2020.
Germany’s need to cut its emissions over time to address climate change would not be reduced by a one-off cancellation of allowances. Spending money on cancellation is therefore a poor investment compared to investment in emissions abatement. Policies that target inefficient power stations can produce more assured emissions cuts. These will reduce the cost of compliance over time by making repeated purchases of allowances unnecessary and avoiding the risk of steeper emissions reductions being necessary in the future.
Sandbag's comparison of the Climate Contribution and the UK Carbon Price Floor