EU Member States Aim for Carbon Market Reserve Launch in 2021

2 April 2015

European member states signed off last week on a mandate to begin negotiating a carbon market stability reserve with EU parliamentarians – including a proposal for a 2021 start date – as part of a broader effort to ensure the long-term sustainability of the 28-nation bloc’s flagship emissions trading scheme.

The EU’s Emissions Trading System (ETS) was the first multinational scheme for trading permits for greenhouse gas emissions, and covers approximately 45 percent of such emissions.

However, the carbon market that underpins the ETS has struggled with an increasing surplus of these allowances, making it difficult to keep permit prices at levels necessary for sustaining investment in low-carbon technologies and spurring the transition away from more polluting energy sources.

The market stability reserve under discussion – which stems from a January 2014 proposal from the European Commission – would essentially act as a price buffer for the EU’s carbon market, removing surplus emissions allowances from the market based on certain trigger thresholds and placing them into a reserve.

Should there be too few allowances on the market, the reserve would then feed those allowances back into the system. The end result, experts say, would stabilise prices and limit the impact of economic shocks, such as those caused by the recent global financial crisis.

While the 28-nation bloc agreed to a “backloading policy” last year, essentially withholding 900 million allowances from the years 2014-2016 that would be re-introduced in 2019 and 2020, this has been deemed a stopgap measure until a more permanent solution – such as the market stability reserve – could be put in place. (See Bridges Weekly, 16 January 2014)

Along with the proposal for a 2021 market reserve launch, how to administer these 900 million “backloaded allowances” was another issued raised by Latvia in its statement on EU member states’ behalf, suggesting that these be transferred directly to the reserve.

Another issue for discussion with EU parliamentarians will include how to address the issue of “unallocated allowances,” for instance in the case of a power plant closing, which member states suggested should be dealt with by the European Commission as part of the planned review of the ETS directive post-2020.

Along with operating in the European Union’s 28 member states, the EU ETS also covers Iceland, Liechtenstein, and Norway, which together constitute the three European Economic Area-European Free Trade Association (EEA-EFTA) states.

Internal clash over start date

The proposed 2021 start date announced by Latvia last week – in line with the date proposed by the European Commission over a year ago – sets up a potential clash between member states and EU parliamentarians, which voted in February for the reserve to begin at the end of 2018. (See Bridges Weekly, 26 February 2015)

How those differing suggestions will be reconciled during the upcoming “trilogue” talks between the EU institutions remains to be seen. Initial talks with parliamentarians were scheduled to begin this past Monday, according to a press release from the Latvian Presidency of the Council of the EU.

Even within the EU’s member states, negotiations among officials were reportedly difficult, with some countries – such as Germany and the UK – pushing for an earlier date of 2017, which was reportedly opposed by Poland, a heavily coal-reliant state, among others.

2030 goals in focus

EU heads of state and government agreed last October that a “well-functioning, reformed” ETS with a market stabilising instrument would play a role in helping the bloc meet its emissions reduction targets for 2030.

Under this new “2030 climate and energy framework,” the 28-nation bloc has agreed to reduce its overall greenhouse gas emissions by at least 40 percent below 1990 levels by 2030, among various other related strategies. (See Bridges Weekly, 30 October 2014)

Furthermore, the 2030 climate and energy framework also envisages a quicker reduction in the EU ETS allowances “cap,” which limits the overall volume of greenhouse gases that power plants can emit.

The cap is currently reduced at a rate of 1.74 percent annually, but this would need to change to 2.2 percent annually from 2021 in order to meet the planned goal of 43 percent reduction in emissions from fixed installations by 2030, compared to 2005 levels.

Global context

The success or failure of the EU ETS, currently the largest of its kind, has been watched closely by the international climate community, particularly as other countries consider ways to reduce their own emissions – including the possibility of using market-based mechanisms.

The EU is also the largest single market, with its 28 member states together making up nearly a quarter of global GDP. When treated as a single entity – and excluding intra-EU trade – the bloc also accounts for the largest sum of world merchandise exports and imports, according to WTO figures, surpassing even China.

Some of the other countries with existing schemes are already in talks with the EU to join programmes. One such example is Switzerland, which despite being an EFTA country is not covered by the EU’s ETS. The two sides confirmed last week that they aim to initial a linking deal in the first half of this year.

New country-wide emissions trading schemes are also on the way from other major players. China, for instance, has announced plans to launch its own national carbon market by 2016, which if completed would surpass the EU as the world’s largest emissions trading programme. (See Bridges Weekly, 18 September 2014)

Conversely, Australia, which launched a highly-publicised carbon tax in July 2012, has since seen that same policy and a planned ETS repealed last July following a change in government. (See Bridges Weekly, 17 July 2014)

While Canberra recently announced a public consultation on the island country’s post-2020 emissions targets following the release of an “issues paper” on the subject this past weekend, government officials have maintained that another carbon pricing policy is out of the question, calling it a job-killer.

On a larger scale, 195 nations are set to meet in Paris, France this December in the hopes of agreeing on a binding global climate deal that would enter into force in 2020, when the current regime under the Kyoto Protocol expires.

Delegates already agreed in February on the text that will form the basis of substantive negotiations for the Paris deal, with the next round of talks slated for June in the German city of Bonn. (See Bridges Weekly, 19 February 2015

Of the many subjects on the table, how to address the role of market mechanisms under the planned climate regime is expected to engender heated debate in the months ahead.

In the interim, UN member states are now in the process of submitting their “intended national determined contributions” (INDCs), which will serve as the building blocks for a final agreement. As Bridges went to press on Thursday, submitted INDCs included Switzerland, the EU, Norway, Mexico, the US, Gabon, and Russia. Countries in a position to do so had been urged to send in their INDCs by the end of March.

ICTSD reporting; “EU Carbon Fluctuates After Nations Agree to Seek 2021 Fix Start,” BLOOMBERG, 26 March 2015; “EU Nations Said Deadlocked Over Carbon-Market Reform Plan,” BLOOMBERG, 25 March 2015; “EU struggles to agree on date for carbon market reform,” REUTERS, 25 March 2015.

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