European Parliament Backs Post-2020 Carbon Market Reform

8 February 2018

The EU’s legislative body adopted a highly-anticipated deal to strengthen the bloc’s Emissions Trading System (ETS) in the post-2020 period on Tuesday 6 February. The compromise package was approved by a large majority of lawmakers, with 535 votes to 104, and 39 abstentions. EU member states will now have a final vote on the reform deal, though this is largely seen as a formality. 

"We have done our best to agree an ambitious update. The ETS has had many detractors over the years. We tackled many problems – from a carbon price that was clearly too low to make the market function to the extremely difficult issue of striking the balance between our environmental ambition and the protection of energy-intensive European industry,” said Julie Girling, the European Parliament’s rapporteur on the ETS reform and a British lawmaker for the European Conservative and Reformist group.

The cap-and-trade scheme is a key tool in the EU’s commitment under the UN’s Paris Agreement to cut greenhouse gas emissions by at least 40 percent compared to 1990 levels by 2030. It caps emissions for 12,000 installations at an annually decreasing level and allows companies to trade carbon permits among themselves to drive cost-efficient emissions reductions.

However, an oversupply of carbon permits has weakened its price signal, with prices tumbling by almost 70 percent since early 2008. This prompted the European Commission to table a reform proposal in 2015, which was followed by a complex negotiating process to lead to the final result.

Strengthening the EU carbon market

The reform measures, agreed in November after months of intense discussions between the European Parliament, the Council, and the Commission, are meant to address the glut of permits and strengthen the EU’s carbon price signal. (See Bridges Weekly, 16 November 2017)

In the post-2020 period, companies will face tighter pollution limits, with the overall cap on the total volume of emissions decreasing by 2.2 percent annually, compared to the current rate of 1.74 percent. This change is meant to help companies cut emissions by 43 percent relative to 2005 levels by 2030.

While the share of free allocation of carbon permits will remain at 43 percent, they will be more strictly targeted towards companies at a higher risk of relocating to countries with less stringent emissions regulations, a phenomenon known as “carbon leakage.”

As a short-term measure to drive up prices, the volume of permits that will be placed in the Market Stability Reserve (MSR) will double to 24 percent of permits in circulation over a five-year period. Some allowances in the reserve will also be invalidated from 2023 if they surpass the number of permits sold at auction in the previous year. The MSR was agreed in 2015 as a tool to absorb excess permits from 2019 onwards.

Under the agreement, two funds will support modernisation and innovation in the EU’s power system.  A “modernisation fund” will assist lower-income EU states in upgrading their power sectors, while an “innovation fund” will finance investments in renewable energy, energy innovation, and carbon capture and storage.

Following Tuesday’s vote, EU carbon permits were trading at around €8.90 per tonne, up 15 percent from when the reform deal was struck last November. Critics warn, however, that this price is still insufficient to spur the necessary transition towards low-carbon investments and energy sources.

"The changes approved today have already helped to push prices up from the paltry €5 per tonne we had a year ago, but won't bring us anywhere near the level needed to meet our Paris climate agreement commitments. Member states now have a duty to come up with national policies to boost the carbon price, for example by introducing national minimum prices that lie above the current ETS price," said Bas Eickhout, a Dutch lawmaker for the Green Party in the European Parliament, on the day of the vote.

New Jersey to rejoin East Coast carbon market

On the other side of the Atlantic, newly-elected Democratic Governor Phil Murphy of the US state of New Jersey has signed an executive order to begin the process of rejoining the East Coast’s cap-and-trade scheme. New Jersey had pulled out from the Regional Greenhouse Gas Initiative (RGGI), as the scheme is known, under its previous Republican Governor Chris Christie.

"Five years ago, New Jersey faced Superstorm Sandy. That storm and the devastation it brought to our state was an all-too-real look at our new normal if we do not take climate change seriously," Murphy said in announcing the order on 29 January. "Climate change is real, and a real threat to our state. Doing nothing is not an option."

Superstorm Sandy was a powerful hurricane which ravaged both some Caribbean island nations as well as various states on the US East Coast and some Canadian provinces. New Jersey and New York were among those US states that were hardest hit, both from the high winds themselves as well as from the intense rainfall and resulting “storm surge.”

Virginia, another state on the East Coast which saw Democrats make significant electoral gains in the 2017 state-wide elections, might be the next US state to join the RGGI, analysts suggest, either building on an executive order issued by the previous governor and/or through legislation. While a bill aimed at enacting the necessary cap-and-trade scheme to meet the RGGI’s requirements is being considered in the state legislature, whether it can muster the necessary votes in Richmond to move forward remains in question after the effort stumbled in committee.

Given its large number of coal-fired power plants, bringing Virginia on board would increase the size of the carbon market by more than 40 percent.

These efforts are another example of US states stepping up their climate ambition to fill the void left by the Trump administration. Last June, US President Donald Trump announced his intention to withdraw the world’s largest emitter from the Paris Agreement and is rolling back other federal climate policies that had been adopted under his predecessor, Democratic President Barack Obama. (See Bridges Weekly, 8 June 2017)

Many US sub-national actors, including governors, mayors, philanthropists, private sector representatives, and civil society leaders have since promised to continue tackling climate change irrespective of what the federal government does.

ICTSD reporting; “Parliament rubber-stamps EU carbon market reform,” EURACTIV, 7 February 2018; “New Jersey to Rejoin East Coast Carbon Market, Virginia May Be Next,” INSIDE CLIMATE NEWS, 29 January 2018.

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