France Pushes for Additional Reforms to EU Emissions Trading System, Report Says

17 March 2016

Amid renewed concerns of falling carbon prices, a French “non-paper” has reportedly been circulated calling for changes to the “Market Stability Reserve” established under the EU’s Emissions Trading System (ETS).

The non-paper, obtained by the Carbon Pulse media outlet, is an informal proposal that is said to be under discussion among other member states and other key players.

The EU ETS allows members of the 28-nation bloc, along with Norway, Iceland, and Liechtenstein, to trade carbon emissions, then auction off extra, unused emissions through an “allowance” system. The scheme has been in place since 2005.

Last September, the European Council approved a decision to create a market stability reserve that will remove and re-introduce excess permits into the system in response to certain supply thresholds. The MSR, as it is otherwise known, is set to begin in 2019. (See BioRes, 9 July 2015)

According to Carbon Pulse, the non-paper calls on EU lawmakers to “face up to the reality that something further needs to be done to address low carbon prices.” Due to a years-long surplus of carbon allowances, prices have stayed low in recent years, and currently hover around €5 – down from highs of €30 in 2008 – leaving these well below levels believed to be necessary to spur low-carbon innovation.

In recent years, reform efforts have been initiated to address some of the difficulties facing the emissions trading scheme, including with the move to “backload” some 900 million permits between 2014 and 2016 and to introduce the MSR where these backloaded allowances will be placed. (See Bridges Weekly, 7 May 2015, 23 July 2015, 29 October 2015, and BioRes 9 July 2015)

However, the most recent drop in carbon prices over the last several months – which some analysts have placed at 45 percent since end-2015, and partly blame on a continued glut of allowances – has led to a growing debate over how much more reform is needed to keep the ETS functioning in the long term.

Meanwhile, the EU has set a binding goal of slashing its greenhouse gas emissions domestically by 40 percent by 2030, relative to 1990 levels – a target that was later worked into the bloc’s contribution  to the Paris Agreement last December under the UN Framework Convention on Climate Change (UNFCCC). Proponents argue that ensuring the continued success of the emissions trading scheme is essential to meeting this goal.

Soft collar for stability?

According to the non-paper, France is pushing for a modification of the MSR, moving from its supply-based approach to a price-trigger mechanism through a “soft collar” system for allowance prices that could better withstand volatility in the carbon market, drawing on examples seen in other schemes, including some sub-national programmes in the US and Canada.

The “establishment of a soft price collar for the European carbon market, to channel the evolution of the market price between a minimum and a maximum, would reduce volatility due to adverse expectations of future emissions and improve predictability of the price of carbon, creating a strong incentive in favour of low-carbon investments and securing revenues for member states,” the document says.

The non-paper proposes using this soft collar concept to implement a formalised price corridor, which it argues would allow the EU to keep carbon allowance prices more competitive and provide more certainty to companies, investors, and governments.

The price corridor would contain three components: an auction reserve price that would “evolve over time based on a predetermined trajectory to give visibility to the minimum price”; a soft price ceiling at three to six times the level of the reserve price that would also follow a pre-set path to “give visibility to the maximum price”; and a mechanism that can adjust through auctions the supply of carbon allowances.

The non-paper also attempts to address potential questions over the impact this change could have on auction revenues – which it suggests would not be significant – and whether there may be detrimental implications for the competitiveness of EU industry. For the latter, France is proposing a series of steps, some of which it intends to describe further in upcoming submissions, aimed at mitigating potential problems.

ICTSD reporting; “EXCLUSIVE: We can’t wait any longer’: France floats EU ETS price support proposal,” CARBON PULSE, 13 March 2016; “EU has ‘failed’ to save carbon market from long-term gloom, say analysts,” THE TELEGRAPH, 12 March 2016.

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