EU Parliament approves watered down ETS reform

The European Parliament plenary on Wednesday (Feb. 15) approved the proposal to reform the EU’s emissions trading system starting 2021.

The vote marks a key milestone in the reform process started in July 2015 with the first legislative proposal put forth by the EU Commission.

After months of tense negotiations divided between the need to push carbon prices up and to protect EU energy-intensive industries from the risk of carbon leakage, last December the EU Parliament’s environmental committee (ENVI) adopted a new a draft law proposing an higher linear reduction factor (the annual rate at which permits should be removed from the market, set at 2.4 percent instead of the 2.2 percent rate of the Commission’s proposal) and establishing a border carbon adjustment measure for importers of certain goods, such as cement.

Wednesday’s Parliament vote backtracked from the ENVI draft law, approving a 2.2 percent linear reduction factor and excluding the border carbon adjustment measure.

Advocacy groups and organizations criticized the vote as a missed opportunity to keep the EU in line with its climate pleadges under the Paris Agreement and to substacially address the chronic oversupply of carbon credits in the EU ETS. In a press statement, Carbon Market Watch said “the lawmakers missed out on an opportunity to strengthen the polluter pays principle through a carbon border tax on cement imports and an end to free pollution permits for the sector”, highlighting that “there is no proof of carbon leakage in the cement sector, and the industry has made over €5 billion windfall profits from receiving too many free permits”.

“This is very disappointing and a hugely wasted opportunity,” Sandbag managing director Rachel Solomon Williams told Climate Home. “Unless Council intervenes to substantially strengthen the System, the EU ETS will now become simply an accounting mechanism, leaving meaningful climate action to happen elsewhere. The fact that the carbon price is unchanged as a result of the vote, still at a paltry €5, speaks volumes.”

The legisative proposal now enters the so-called “trilogue” negotiations between the European Parliament, Commission and Council, which represents member states.

According to the official release, the Parliament also approved to double the capacity of the Market Stability Reserve (MSR), the mechanism envisioned to regulate the surplus of permits on the market, starting with 800 million allowances to be removed from the MSR as of 1 January 2021. They also supported the inclusion of the shipping sector in the ETS in the absence of climate action at the global level and more stringent rules for the aviation sector. According to Reuters, representatives of the shipping sector promptly commented against the envisioned inclusion, favouring instead reaching a global agreement through the United Nations’ shipping agency, the IMO. In November 2016 the IMO started designing a “road map” towards the adoption of final CO2 reduction commitments in 2023.

The ETS reform proposal also includes two funds will be set up and financed by auctioning ETS allowances. A modernisation fund to help lower-income member states upgrading their energy systems, and an innovation fund to provide financial support for renewable energy, carbon capture and storage and low-carbon innovation projects.

MEPs also propose a “just transition fund”, pooling auction revenues to promote skill formation and reallocation of labour affected by the transition of jobs in a decarbonising economy.


(Image: MEPs vote in favour of a resolution for labelling of meat in processed foods by country of origin, Feb. 11, 2015. Photo credit: © European Union 2014 – European Parliament)