European Council agrees upon common position on carbon market reform

The European Council of environmental ministers has reached a compromise with respect to the reform of the EU Emission Trading Scheme (ETS) last Tuesday (Feb. 28). According to Reuters, nineteen member states approved the compromise proposal, representing more than 70 percent of the EU population – thus satisfying the required minimum of 16 member states representing at least 65 percent of the total EU population. This comes shortly after the European Parliament concluded its deliberations on the same issue.

The considerations in the two EU bodies dealt with the future design of the EU ETS in the period from 2021 until 2030. The EU ETS has to be arranged to fit the 2030 climate and energy framework of the EU. To achieve the 40 percent greenhouse gas emissions reductions until 2030 compared to 1990, the sectors covered in the EU ETS have to reduce their emissions by 43 percent compared to 2005 levels in the forthcoming period.

The EU ETS covers around 45 percent of the greenhouse gas emissions in the EU. It includes several sectors such as the energy sector, iron and steel production, the mineral industry and the wood, pulp, paper and board industry. However, the price of the certificates in the EU ETS is currently far too low to provide clear market signals and incentivize further emission reductions. The chronic oversupply is attributed to an excess of allowances stemming from the beginning of the system’s operation and to the economic crisis in 2009 which has led to a decrease in energy demand. Thus, the price of an allowance has plummeted from the initial 30€ per ton CO2 to currently about 5€.

With its decision, the European Council has now marked its position with respect to the initial proposal of the Commission made already in July 2015 as part of the ‘summer package’. As the Guardian reports, the European Council has joined the European Commission with respect to the linear reduction factor: the rate at which the emission allowances shall be reduced annually.  It shall be increased from currently 1.74 percent to 2.2 percent from 2021 onwards. The European Parliament has come forward around two weeks ago with the same number. However, it backtracked from the recommendations of its environmental committee which advocated for an increase of up to 2.4 percent. Nevertheless, both the European Parliament and the European Council are in favor of reviewing the linear reduction factor in 2024 to then consider an increase of 2.4 percent.

In line with the European Parliament, the European Council has also agreed that the capacity of the Market Stability Reserve (MSR) shall be doubled to 24 percent of allowances (the Commission proposed a share of only 12 percent to be withdrawn temporarily from the market). The ministers also concluded that starting from 2024, allowances held in the MSR for more than three years, above a ceiling of 650 million, should be cancelled, Reuters reports.

Sweden, France and the Netherlands reportedly pushed for more ambitious measures in order to increase the impact of the EU ETS. They finally won the support of Germany which had previously joined Austria, Greece, Italy and eastern European countries in favoring measures to prevent carbon leakage, especially in the steel sector. Germany’s state secretary emphasized that the protection of the European industry would be as important as climate mitigation. The migration of production sites to countries with less ambitious climate policies shall also be prevented with the Innovation Fund as proposed by the European Commission. The fund is supposed to support the respective industries in developing innovative technologies.

The proposed measures raised new criticism from environmental and advocacy groups, denouncing  the weakness of the reform plan in supporting the achievement of the Paris pledges and in substantially implementing the polluter pays principle. Based on the decisions of the Council, negotiations will now be initiated between the Commission, the Parliament and the Council. It will be the European Parliament and the European Council to adopt the final decision on the future ETS design.


(Image: STRAATSBURG – Vlaggen voor het gebouw van het Europese Parlement. Source: ANP XTRA LEX VAN LIESHOUT).