EU deal on Market Stability Reserve sets forth ETS reform

An informal agreement in the trilogue talks between MEPs and the Latvian presidency of the EU council regarding the future of the European Emission Trading Scheme (EU ETS) was reached on Tuesday (May 5), the European Parliament disclosed in a press release.

The agreement deals with the launch of a Market Stability Reserve (MSR) to fix the low market price caused by a surplus in emission allowances available in the EU ETS. According to the press release, the exceeding allowances will be transferred to the stability reserve starting from January 1, 2019.

The existing EU ETS regime imposes a very rigid auction supply for allowances that does not take into consideration market fluctuations caused by, inter alia, volatility of oil prices and the economic downturn. Due to this situation, the current status sees an oversupply of allowances in the market that keeps the EU carbon market price low (currently around € 7.5/t). The exceeding amount consists of 900 million “backloaded” allowances, whose auctioning was withheld in the previous years and postponed to 2019-2020, and roughly 600 million unallocated allowances.

The Market Stability Reserve is meant to increase the flexibility of the auction supply, removing exceeding allowances to adjust the market price upwards. A rise in carbon price would correspond in more effective incentives to cut GHG emissions. It is believed that the MSR would make the EU ETS more resilient to variations in supply and demand of emission allowances. The Tuesday’s deal places both backloaded and unallocated allowances directly in the reserve.

In the new agreement the MRS starting date has been set earlier than what was initially planned by the European Commission, which had proposed 2021 as launching year. It was possible to overcome the opposition from a blocking minority pushing for a delay in MRS implementation thanks to some favorable conditions for Central and Eastern Europe Member states that were included in the deal. Noteworthy is with this regard the inclusion of “solidarity allowances”, which account for 10 percent of the annual total allowances and will be allocated to certain Member states. Such allowances will be exempt from the reserve until 2025, the press release revealed.

An analysis by Thomson Reuters Point Carbon estimated that, were the reform implemented, carbon price would rise to € 19/t and € 32/t by 2020 and 2030 respectively. Price hike would entail significant economic returns for Member states for the auctioning of carbon permits, Reuters observed.

The deal was positively welcomed by many, although it is perceived that a more inclusive reform is necessary. Carbon Market Watch urged the need for a mechanism preventing surplus allowances to re-enter the market, since the emissions stored in the MSR are not permanently withdrawn. At the end of each trading period, unused allowances should be automatically removed from the market, they argue.

The compromise will be voted first by the Environmental Committee on May 26 and then to the plenary session of the EU Parliament on July 6. After that date it will be put on the agenda for a Council of Ministers.

(Image: Laimdota Straujuma, Prime Minister of Latvia, and Martin Schulz, EP President, during the inaguration of the Latvian Presidency, January 14, 2015. Photo credit: European Parliament/Flickr)