Reform of EU ETS approved in "landmark" deal

7th May 2015

A draft law to reduce the surplus of carbon credits has this week been informally agreed by the European parliament, council of ministers and commission.

The proposed law would create a system to automatically transfer a portion of emissions trading system (ETS) allowances into a market stability reserve (MSR) if the surplus exceeds a specified threshold. Allowances could also be returned to the market if the surplus is below the threshold.

There are currently 2.1 billion excess allowances currently on the market, according to estimates by Sandbag, which campaigns to reform the ETS. This oversupply lowered the price of allowances, undermining the system’s ability to incentivise big energy users to lower their greenhouse-gas emissions.

Carbon credits are currently trading at €7.64/tonne of CO2, compared with around €30/tonne in 2008, when there was no surplus.

MEPs had already agreed that 900 million “backloaded” allowances would be transferred to the MSR. This week’s discussions clarified that a stockpile of free allowances that are no longer needed by manufacturers would also be added to the reserve. There are around 600 million of these, according to the European parliament, though estimates by Sandbag are far higher.

The commission had originally proposed 2021 as the start date for the MSR, but the parliament’s environment committee in February voted to bring this brought forward to 2019. The UK and Germany argued for it to start in 2017, however, while eight states, including the Czech Republic and Poland, were against any earlier start. Their resistance was overcome when several states agreed to initially contribute more allowances into the reserve.

As part of this week’s deal, the commission said it would consider creating a fund of 50 million allowances to promote low-carbon industrial innovation as part of its upcoming discussions on how the ETS will work after 2020.

Ivo Belet, the Belgian MEP who is steering the legislation through parliament, said: “We have struck a good balance between an ambitious and effective reform of the ETS and strong guarantees to ensure that Europe’s energy-intensive industries are not obliged to move their production facilities to countries outside the EU with less stringent climate policies.”

Sandbag hailed the deal as a “landmark agreement” and described it as a powerful step towards correcting the imbalance in Europe’s carbon market. It should remove around 2.2 billion allowances from the market by the end of 2020, it estimates.

However, it urged member states to cancel a significant volume of allowances as part of the post-2020 ETS package.

Damien Morris, head of policy at Sandbag, said: “After a decade of what seemed like terminal decline, this enhanced stability reserve has the potential to inject new life into the carbon market.

“But the policy is not out of the woods yet: key issues still need to be resolved during an overhaul of legislation expected later this year, the most important of which is the overall ambition of the emissions cap. This will need to be significantly tightened before we can truly say we have a carbon market fit for purpose.”

The provisional agreement on the MSR will go to a subsidiary body of the council of ministers for confirmation on 13 May. This will be followed by a vote by the environment committee on 26 May, and the whole parliament in July.

These votes are not expected to result in any changes to the agreement, according to Sandbag.


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