Improvements needed to European system for reducing carbon emissions

Europe’s key mechanism for getting businesses to reduce carbon emissions needs to be improved if it is to succeed, according to Essex research.

Following a major review of the European Union’s Emissions Trading System (EU ETS)  researchers from Essex and Cyprus have concluded that while it has had some success in reducing pollution, it is failing to praise good behaviour and punish bad, so ultimately it is destined to fail, unless changes are made.

Introduced in 2005, it is the first and most widely-used system aimed at cutting emissions from the world’s major polluters.  It covers 12,000 high energy-businesses, who between them are responsible for around 45% of Europe’s greenhouse gas output.

It works by setting limits on the level of emissions individual businesses can produce There is also an  overall cap for all the installations in the system, with that total cap reducing over time to bring down emission levels.

Participating organisations must purchase additional allowances if they exceed their individual limit while those that do well, and keep emissions below their allowance by switching to less carbon-intensive technologies, can sell the surplus for profit.

Professor Neil Kellard, from the Essex Business School at the University of Essex and Panayiotis Andreou, Assistant Professor of Finance at the Cyprus University of Technology analysed data from the start of the scheme to 2016 to assess how well companies have responded and the overall success of the scheme.

“Our results suggest there is an economic cost to good environmental behaviour, with those who are most successful at reducing greenhouse gasses seeing their profit-margins suffer. Despite this private companies are more likely than publicly-listed or state-owned ones to be proactive in cutting emissions.

“Since the system was introduced there has been an overall drop in emissions of about 26%, but the fluctuating value of greenhouse credits mean this early success may not continue. It appears firms will switch from being proactive when market prices are relatively high to becoming non-proactive when prices are relatively low.

“So while the system has been broadly successful in reducing emissions, it is not yet adequately compensating proactive firms or penalising those who pollute. All too often market prices have been too low, encouraging less proactive behaviour,” said Professor Kellard.

The research has been published in the British Journal of Management.