European Commission proposes a legislative draft on post-2020 EU ETS

On Wednesday (July 15) the European Commission released a legislative proposal to revise the EU emission trading scheme (ETS) for the post-2020 scenario.

Reforming the ETS represents a crucial step for the EU to fulfil its emission reduction ambitions. In line with the 2030 climate and energy policy framework, the Union yearns for curbing the 2030 domestic Greenhouse Gas (GHG) emissions by at least 40% compared to 1990.

Besides the legislative draft concerning the ETS reform, the Commission proposed on the same day its strategies to deliver a new deal for energy consumers, to launch a redesign of the European electricity market and to update energy efficiency labelling. The four measures together were named energy summer package.

Launched in 2005, the EU ETS has been targeted by conflicting critiques throughout the last decade. On the one hand, multiple stakeholders claimed that allowances were over-allocated during the current trading period. Oversupply of emission credits resulted in driving down their price, thus undermining the scheme’s ambitions and credibility. On the other hand, several industries firmly opposed the ETS. Particularly, energy-intensive sectors accused the scheme of stifling their competitiveness and obstructing innovation. According to industries’ spokespersons, the ETS exacerbated the phenomenon called “carbon leakage”, which occurs when businesses reallocate their production to countries with looser climate policy due to lower costs.

The legislative proposal aims to tackle both problems simultaneously. Firstly, the Commission will augment the linear emission reduction factor to fulfil the 2030 GHG emission reduction target. Starting from 2021, the amount of allowances available will decline by a 2.2% rate, namely roughly 0.5% more than in the current trading period. Commission experts estimate to reduce GHG emissions of about 556 tonnes between 2021 and 2030.

Speeding up the annual rate at which it reduces the quantity of permits, the Commission will diminish the number of pollution credits granted from 2021 onwards. The amount of allowances made available will not exceed 15.5 billion. Given the price of €25 per permit expected by the Commission, pollution credits emitted will worth overall €387.5 billion.

The Commission also recognizes that in the near future “there may be risks for some businesses exposed to international competition”. To avoid carbon leakage, the Union will continue to guarantee free emission credits to energy intensive industries. Furthermore, the share of allowances to be auctioned will remain the same established between 2013 and 2020.

Nevertheless, the quantity of pollution credits will be limited and declining compared to the previous trading period. 57% of allowances will be auctioned by member states, being worth around €225 billion. Industries will receive for free the residual 47% of them, namely 6.3 billion of emission permits. The distribution of free allowances has an estimated value of €160 billion.

“The allocation of free allowances will be focused on the sectors at highest risk of relocating their production outside the EU,” declared the Commission in its fact sheet. From the current 177 sectors on the carbon leakage list, only about 50 of them will benefit from free allowances between 2021 and 2030. According to Euractiv, industries entitled to free credits are expected to include sectors such as steel, aluminium, chemicals, paper, fertilisers, lime and glass.

Additional measures contained in the legislative proposal include the implementation of an innovation fund and the establishment of a modernisation fund. The innovation fund, based on the previous NER300, aims to encourage investments in renewable energy, carbon capture and storage and low-carbon innovation in energy intensive industry. The modernisation fund, instead, sustains member states that struggle with modernising their energy systems.

Finally, the European Commission opted for providing allowances to new entrants and considerable augments in production from a separate reserve. The latter will be established utilizing 250 million of unallocated allowances from the Market Stability Reserve and supplemented by allowances that remain unused from 2021 onwards.

Stakeholders reacted differently to the legislative draft. While Eurelectric backed the initiative, exponents of energy-intensive sectors accused the measure of exacerbating the risk of carbon leakage. In contrast, climate advocacy groups stressed how the Union failed in tackling effectively the oversupply of pollution permits.

The proposal needs to be ratified by the European Parliament and Council of Ministers before becoming law. According to Reuters, the whole process might take up to two years.

 

 

(Image: on the left, Maroš Šefčovič, Vice President of the European Commission, in charge of Energy Union; on the right, Miguel Arias Cañete, EU Commissioner for Energy and Climate Action; July 2015. Photo credit: European Commission )