EU Environment Ministers Agree Position for Carbon Market Reform Talks

2 March 2017

Environment ministers from the European Union’s 28 member states met on Tuesday 28 February to discuss reforming the bloc’s flagship carbon market for the post-2020 period, agreeing on a “general approach” to upcoming negotiations just a few short weeks after the European Parliament approved its own position.

The day-long meeting in Brussels, Belgium, saw ministers under the EU’s Environment Council continue their debate well past their scheduled closing time in a bid to reach a compromise approach as they head into “trilogue” negotiations with the European Parliament and the European Commission.

In a sign of the difficulty of the talks, the final “general approach” reportedly had nine EU member states vote against it, according to the Reuters news agency and other media outlets.

The efforts to reform the EU’s Emissions Trading System (EU ETS) for its upcoming “phase 4” from 2021-2030 have been underway for nearly two years, with the European Commission putting forward its legislative proposal on the subject in July 2015, after which EU parliamentarians debated the reforms and ultimately approved their own set of draft plans in February 2017. (See Bridges Weekly, 16 February 2017 and 23 July 2015)

The EU ETS has been in place since 2005 and is currently the largest carbon market in operation. The scheme covers emissions across a range of industries, and applies to all 28 EU member states as well as Iceland, Liechtenstein, and Norway.

In the wake of the financial crisis, however, the system has struggled with a massive oversupply of permits that has been driving down permit prices to levels below what experts say is essential for stimulating low-carbon investments. This development, along with the EU’s agreed commitments under the UN’s Paris Agreement on climate change, has fuelled efforts toward upgrading the cap-and-trade scheme.

“This is important for us, for our planet and for future generations. The Paris Agreement was a landmark achievement, but we need to put words into action,” said José Herrera, Maltese Environment Minister. Malta currently holds the rotating Council presidency.

Market stability reserve, funding mechanisms

“The agreement reached today by ministers keeps the overall architecture of the European Commission proposal, while making important changes on a triangle of key issues,” said Miguel Arias Cañete, who serves as the European Commissioner for Climate Action and Energy, in comments to reporters after the meeting.

Ministers have reportedly agreed on a proposal to increase the availability of carbon permits for industry “if needed” in order to limit the possibility of “carbon leakage,” which involves cases where businesses relocate their production to countries with less stringent emissions policies. Specifically, this would reportedly involve giving out an additional two percent of permits freely rather than auctioning them.

According to Arias Cañete, ministers have also proposed “doubling the speed with which the surplus of allowances on the market will enter the market stability reserve,” referring specifically to the system approved in 2015 that will aim to tackle the glut of permits in the EU’s carbon market.

This doubling would increase the rate of removing excess permits from the MSR to 24 percent for its first five years in operation, as opposed to 12 percent. Ministers also reportedly agreed on the idea of cancelling some permits in the reserve should they exceed a certain level from the year 2024 onward. The market stability reserve (MSR) is due to open in January 2019. (See Bridges Weekly, 9 July 2015)

Furthermore, the Environment Council has also signed off on “simple and transparent rules” to support the financial schemes that aim to help less affluent EU member states upgrade their energy systems in favour of lower-carbon alternatives, according to Arias Cañete.

While the overall agreement on a “general approach” to negotiations was welcomed by many environmental groups, there were also calls for greater ambition in the “trilogue” talks ahead.

“By comparison to where we started the reform process, today’s decision is a small step in the right direction. By comparison to where we should be to stop the climate crisis, this decision is a wasted opportunity,” said Wendel Trio, Director of Climate Action Network (CAN) Europe.

Other climate watchers, such as WWF Europe, also questioned the move toward giving industries free permits as opposed to auctioning them off, suggesting that the latter option could provide useful financing toward supporting other climate-directed measures.

“The upcoming negotiations between the European Parliament and member states must be used to correct these mistakes to make the EU carbon market fit for purpose,” said Imke Lübbeke, WWF European Policy Office’s Head of Climate and Energy.

Meanwhile, the International Emissions Trading Association (IETA), a non-profit business group favouring emissions trading, praised the increases proposed in the MSR’s “intake rate” and additional industry safeguards.

“Yesterday’s decision is a big step towards finalising work on market reform that aims to strengthen the system for years to come,” said Julia Michalak, who serves as the organisation’s EU Policy Director.

ICTSD reporting; “UPDATE 1-EU nations thrash out deal on carbon market reform,” REUTERS, 1 March 2017; “Reform of EU carbon trading scheme agreed,” THE GUARDIAN, 28 February 2017; “EU ministers reach compromise on carbon market reform,” EURACTIV, 1 March 2017.

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