Crucial compromise to move EU ETS reform forward expected in December

Two key dates on the legislative proposal to modify the European Emission Trading Scheme are expected before the end of 2016.

On December 15 the EU Parliament’s environmental committee (ENVI) will vote on the draft report considering the Commission’s proposal to revise the European carbon market in phase 4, starting from 2021. The ENVI vote was scheduled on December 8, but it has been postponed because major parties remain divided over how far the reforms should go, Reuters reported. The crucial problem is finding an agreement on how to push the European carbon price up without hurting energy-intensive industries that may be exposed to the risk of carbon leakage.

The EU’s Environment Ministers will discuss the proposal on December 19.

The EU ETS, the world’s biggest carbon market, is currently undergoing a reform process mainly aimed at tackling the long-standing problem of allowances surplus that has led to a progressive price fall from €30/ton in 2008 to below €5/ton in 2016.

Under the Commission’s proposal, the sectors covered by the EU ETS will need to reduce their emissions by 43 percent compared to 2005 in the 2021-2030 period. In line with this target, the linear reduction factor (the rate at which the emission allowances are reduced annually) would increase to 2.2 percent from 2021 onwards, instead of the current 1.74 percent. Beside other changes tackling the risk of carbon leakage, the Commission’s proposal introduces support mechanisms to help the industry and the power sectors in the transition to a low-carbon economy: the Innovation Fund, dedicated to the demonstration of innovative technologies in industry, and the Modernization Fund, to facilitate investments in the power sector in lower income member states.

The proposal is to be adopted through the ordinary legislative procedure, thus co-legislated by the EU Parliament and the EU Council.

According to EU Parliament release, over 700 amendments were presented on the draft law, concerning the linear reduction factor, the auction share, free allocation and carbon leakage provisions, the use of auction revenues, compensation of indirect emissions costs, the Modernisation and Innovation Funds.

Reuters reported that the Socialists and Democrats party is pushing for a higher linear reduction factor of 2.4 percent.

Ian Duncan, the rapporteur in charge of striking a compromise to handle the draft report to the Parliament plenary, has proposed doubling the rate at which the EU’s carbon market stability reserve (MSR) will remove the excess allowances for the first three years after it enters into force in 2019. He also proposed to cancel 750 million carbon allowances from the MSR.

In November a group of 31 European organisations and networks published an open letter calling on the members of the ENVI committee to vote for a reform that supports “fair, inclusive and just transition from coal towards a low-carbon economy”, including i.e. a higher linear reduction factor and strong investment criteria to exclude coal generation from funding under the Modernization Fund.

 

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