"Falling emissions in declining economy" shock!

Preliminary data released today (as reported in EurActiv, and picked up by OpenEurope) indicates that emissions from the sectors covered by the EU-ETS fell 6% in 2008.

Naturally, the pro-EU-ETS brigade have hailed this as evidence that the EU-ETS is working. I think they should be a little more cautious.

We need to know to what extent the reduction was the result of the economic downturn, to what extent it was the result of increased energy prices, and to what extent it was the result of the incentives provided by the EU-ETS.

The data is not yet available for the purposes of comparison, but there will be an easy way to test the effect of the EU-ETS, if not the relative roles of the other two factors (and there are probably others).

If we see emissions carry on up in those developed countries not covered by a cap-and-trade scheme while they fell in the EU, it will be reasonable to attribute some of the success to the EU-ETS. If, on the other hand, emissions fell in 2008 in countries that were not subject to a cap-and-trade scheme, we may reasonably infer that the fall was more the result of other factors such as economic tightening and higher prices, and less to do with the EU-ETS.

We also ought to look at emissions relative to indicators of economic health, not in abstract form. Most economic indicators of national prosperity are unsatisfactory in one way or another, but if we take GDP as an imperfect but widely-accepted measure, we should compare the change in emissions relative to changes in GDP in the different areas, not simply the absolute changes in emissions.

We should probably also take account of changes in population, as each additional head in developed countries tends to increase emissions by the per capita average.

Another give-away would be if the reduction over the course of a Phase of the EU-ETS were more than required by the mechanism. The mechanism is designed only to deliver just enough, and provides absolutely no incentive to go further, so if we see emissions fall to well below the cap, we will know that something else (e.g. economic decline or offshoring of industry) was up.

And we ought to remember that one swallow does not make a summer. We would need sustained evidence over several years that industries covered by the EU-ETS were reducing their emissions relative to their output by more than industries outside the EU-ETS (or other cap-and-trade schemes), to be able to attribute the reductions to the EU-ETS rather than to other factors. 

The preliminary figures for 2008 emissions strongly suggest that the price of EUAs (allowances under the EU-ETS) should fall further than their already low level (at which many large companies are already saying that there is insufficient incentive to invest in emissions-reducing technologies). With a minimal carbon-price, delivering further emissions-reductions over the coming years, other than as a result of a general reduction in output due to the state of the economy and the cost of energy, will be a challenge.