Carbon Markets: EU ETS Reform Efforts Press On, NZ Aims for Net Zero Emissions by 2050

26 October 2017

The weeks ahead are set to see a flurry of activity in carbon markets, as EU negotiators attempt to finalise reforms to the bloc’s Emissions Trading System (ETS) for the post-2020 period, while new leadership in New Zealand has promised the prompt introduction of a “zero carbon act,” with implications for its own climate action efforts.

The carbon market developments come just weeks ahead of the UN Framework Convention on Climate Change’s (UNFCCC) annual Conference of the Parties (COP). The talks are scheduled for 6-17 November in Bonn, Germany, and are being held under the Fijian presidency.

EU ETS push

On the EU front, negotiators have spent several months in intense talks aimed at updating the bloc’s flagship carbon market. The reform effort itself, however, began two years ago when the European Commission tabled its proposals on the subject.

Despite efforts to clinch a deal earlier this month, that attempt stumbled following a disagreement over a “modernisation fund,” which aims to help the bloc’s lower-income members upgrade their own power sectors. Negotiators hit a roadblock over what performance standard should serve as a pre-condition for financing the fund, with the European Parliament backing a limit of 450 grams per kilowatt hour – which would mean that coal plants would not be eligible for support from the new programme.

While backed by some EU member states, countries such as Poland whose economies rely heavily on coal power have pushed against this performance standard.

The bloc has set a target to slash greenhouse gas emissions by at least 40 percent relative to 1990 levels by the year 2030, with the ETS a key part of meeting that goal. According to the Commission, this target would require that the different sectors covered in the emissions trading scheme would need to cut their own emissions by 43 percent relative to 2005 levels.

Along with meeting these emission reduction goals, the ETS reform effort also aims at addressing some of the problems that have arisen during the scheme’s operation, including the glut of carbon permits that have led to dangerously low prices.

Those reform talks are being held in the “trilogue” format, involving negotiators from the three EU institutions: the Council, the Parliament, and the Commission. The group of deputy permanent representatives tasked with these trilogue negotiations is known as “Coreper I.”

The next EU ETS trilogue is slated for 8 November, according to a statement on social media from a spokesperson for Coreper I under the current EU Council presidency. That meeting has been floated as a possible opportunity for finalising the talks.

Advocates of carbon pricing have urged negotiators to ramp up their efforts, noting that the UN climate talks are set to coincide with that Coreper I meeting.

“We urge negotiators to redouble their efforts to reach a deal at the next trilogue meeting, set to be held before this year’s round of UN climate negotiations in a few weeks,” said Dirk Forrister, the CEO and President of the International Emissions Trading Association (IETA), a non-profit business coalition.

Brexit, aviation amendments clinched

While the EU ETS reform talks continue, negotiators did sign off last week on two other amendments to the scheme. One of these is aimed at protecting the bloc’s flagship carbon market in the event of a “hard Brexit” – in other words, should the UK leave the EU in 2019 without a deal.

Should a hard Brexit occur, one concern had been the potential flooding of permits into the ETS from UK companies. The amendment reached would void UK permits from 2018 and 2019 in order to stave off that problem, though the possibility has been floated that the UK could still remain part of the carbon pricing scheme even after it leaves the EU in March 2019.

Negotiators have also signed off on an amendment which extends a previously-agreed period for exempting international flights with non-EU entry or departure from the ETS’ coverage. The period is now set to end in 2023, which is meant to grant enough time for a new global market-based mechanism aimed at curing international aviation emissions to get underway.

The new global scheme, reached last year under the International Civil Aviation Organization (ICAO), is set to kick off its pilot phase in 2021 and its “first voluntary phase” in 2024, with a second phase for all countries, with a few exceptions, set for 2027. The EU already confirmed plans to participate from the outset of the programme. (See Bridges Weekly, 13 October 2017)

New Zealand: Ardern to submit “zero carbon act”

In a separate development, incoming New Zealand Prime Minister Jacinda Ardern has pledged to set a national goal of net zero carbon emissions by mid-century, along with setting out enforceable targets for cutting emissions.

Ardern was confirmed as Prime Minister-elect a week ago, as part of a coalition government. The incoming leader has included the climate strategy as part of a 100-day plan that also includes tackling child poverty, slashing costs of tertiary education, and beginning to clean up New Zealand’s waterways. Ardern has said that climate change and women’s issues, such as equal pay, are key policy issues for her governing coalition.

Her Labour Party has also pledged to set up an independent “climate commission,” whose role would include setting targets for cutting emissions and conducting related analysis. Furthermore, they have backed the use of carbon budgets to help meet their climate action goals.

New Zealand already has an emissions trading scheme in place, which covers various sectors, such as iron, steel, and aluminium, as well as energy production and waste, among others. Forestry is also covered in the scheme. Ardern has proposed incorporating agriculture into the scheme, moving towards an ETS that covers “all gases, all sectors.”

ICTSD reporting; “EU talks over carbon trading reforms hit impasse,” REUTERS, 13 October 2017; “Jacinda Ardern commits New Zealand to zero carbon by 2050,” CLIMATE HOME, 20 October 2017; “Talks end with no deal on EU CO2 market overhaul,” PLATTS, 13 October 2017; “Carbon market reform: Much ado about nothing?,” EURACTIV FRANCE, 23 October 2017; “EU agrees on Brexit-proof emissions trading amendment,” EURACTIV, 18 October 2017.

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