EU Strikes Draft Deal on 2019 Launch for Carbon Market Reserve

7 May 2015

EU negotiators have struck a draft compromise on the launch date and operation of the 28-nation bloc’s planned “carbon market stability reserve” (MSR) mechanism, which is now set to take effect from 1 January 2019.

The “agreement in principle” was reached on Tuesday after difficult negotiations between representatives from the EU institutions, capping a process that began early last year when the Commission put forward its proposal for such a mechanism.

“We have struck a good balance between an ambitious and effective reform of the ETS and strong guarantees for European energy-intensive industry to prevent carbon leakage,” said Ivo Belet, the rapporteur for the ETS reform legislation in the European Parliament and a Belgian member of the European People’s Party (EPP).

More stable prices?

The planned MSR aims to prop up the EU’s struggling carbon market, which is the backbone of its Emissions Trading System (ETS). The mechanism would effectively act as a price buffer, removing excess emissions allowances from the EU carbon market based on set “trigger” thresholds and then putting these into a reserve. Those allowances could later be fed back into the system if the number of allowances on the market is too low.

The goal of this measure would be to stabilise carbon allowance prices, which have struggled to stay at levels high enough to encourage low-carbon technology investments and spur improvements in energy efficiency. After hitting a historic peak of €30 per tonne years ago, permit prices now hover at around €7 per tonne, only slightly higher than their €5 lows.

The EU ETS has been in place since 2005 and covers approximately 45 percent of total greenhouse gas emissions (GHGs) from the bloc’s 28 member states, as well as Iceland, Liechtenstein, and Norway. The scheme works by capping the emissions allowed across the EU, then requiring companies to surrender allowances, or permits, for every tonne of GHGs emitted. These permits can also be traded among companies, either selling or buying them depending on their respective needs.

A few final procedural steps remain before the deal can be enacted. The consolidated text of the agreement must receive approval by the Committee of Permanent Representatives (COREPER). The deal will then need to be formally adopted by the Council.

On the Parliament side, votes will be needed by both the Environment Committee and full plenary, which are expected in late May and early July, respectively.

Czech move breaks blocking minority

One of the main sticking points in the negotiations had been when exactly to launch the MSR, with previous suggested start dates ranging from end-2018 to 2021. The former had been backed by EU lawmakers in the Parliament’s environment committee, while the latter had been signed off on by the European Commission and EU member states.

The final 2019 date was proposed by Latvia, which holds the rotating presidency of the Council of the EU, after the Czech Republic reportedly left a “blocking minority” in the Council that was pushing for a later date. This minority had been led by Poland, which is heavily reliant on coal.

Along with setting the start date, the deal also says that the 900 million allowances that were “backloaded” from the 2014-2016 trading period to 2019-2020 would be placed on this market reserve.

Any unallocated allowances will be put directly in the market reserve in 2020. How these allowances are dealt with will be one of the elements under consideration during a planned ETS review. Furthermore, the upcoming EU ETS and market stability reserve review will need to take into account issues such as carbon leakage – where production is moved abroad to countries with lower environmental standards – and competiveness aspects.

In elaborating their post-2020 climate and energy framework, EU heads of state and government had 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. (See Bridges Weekly, 30 October 2014)

Environment groups react

News of the agreement was broadly welcomed by environmental groups, with some referring to it as a first step in what ideally will be a greater reform.

“European policymakers have come to the rescue to salvage the EU ETS from drowning in a huge oversupply of emission allowances,” said Femke de Jong, policy officer at Brussels-based Carbon Market Watch.

The organisation has urged the Commission to make additional changes under the upcoming ETS review, such as putting in place a system for automatic removals of any unused allowances at the end of each trading period.

Damien Morris, who is the Head of Policy at the UK-based climate group Sandbag, also termed the decision as a “huge turning point for Europe’s climate policy.”

“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,” Morris said, referring specifically to the need to tighten the existing limits.

ICTSD reporting; “EU Agrees to Overhaul Carbon-Trading System,” THE WALL STREET JOURNAL, 5 May 2015; “EU carbon market reforms back on the table,” FINANCIAL TIMES, 30 April 2015; “UPDATE 1-New EU proposal suggests Jan. 1, 2019 start for carbon market reform,” REUTERS, 27 April 2015.

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