EU carbon market reform faces key parliamentary vote in Strasbourg

The European Parliament is scheduled to consider the reform proposal of the EU’s emissions trading system in plenary session this week.

The ETS is undergoing a reform process for its fourth phase (2021-2030), 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 the current levels around €5.

In mid-December the EU Parliament’s environmental committee (ENVI) adopted a draft EU ETS reform, after months of tense negotiations divided between more ambitious criteria to push carbon prices up and the need to protect EU energy-intensive industries from the risk of carbon leakage.

The EU ETS is the world’s largest carbon market and one of the key tools for the 28-bloc to achieve its 2030 emission reduction target (see below the infographic by the EU Parliament). According to the recent Carbon Market Monitor study by Thomson Reuters, the EU ETS dominates the global emission trading landscape both in the global volume (87 percent) and value (82 percent). However, the chronic oversupply has led prices to a large extent driven by sentiment and the market exposed to speculative selling despite any political progress or efforts.

The compromise draft law includes a higher rate at which permits should be removed from the market (the linear reduction factor), in order to achieve an emission reduction of 43 percent compared to 2005 in the EU ETS phase 4 (2021-2030). EU lawmakers opted for a 2.4 percent rate of annual reduction from 2021, instead of the 2.2 percent linear reduction factor originally envisioned in the Commission’s proposal. Other mechanisms designed to tackle oversupply are the removal of up to one billion allowances and an increase in the EUAs amount the Market Stability Reserve (MSR) will withdraw from the market: a maximum of 24 percent of allowances each year for the first four years, thus an higher rate compared to the previous 12 percent share on the table. The proposal also includes shipping in the ETS and provides exemptions for the steel and fertilizer sectors, while establishing a border carbon adjustment measure for importers of certain goods, such as cement.

At the EU Council later in December, environment ministers discussed the ETS review but failed to find an agreement.

If approved, the EU member states, the Commission and Parliament will then start talks to set out a final market reform deal. Amendments will form the basis of further negotiations with the governments of member states on the final text of the directive.

 

(Image: European Parliament Plenary session in Brussels, January 28, 2015. Photo credit: European Parliament/Flickr)