UK calls for a deeper ETS reform cancelling surplus permits

The Department of Energy and Climate Change of the United Kingdom government on Wednesday (July, 16) published a report setting out the UK vision for the EU ETS in fourth phase starting in 2021.

The document was disclosed following an informal meeting of EU environment ministers in Milan, Italy, and it highlighted the need  for a substantial and comprehensive reform of the EU ETS, calling for “cancellation of an ambitious volume of allowances to reduce the current surplus and help restore the balance between supply and demand”.

The UK welcomed the EU Commission’s proposal issued in January for a Market Stability Reserve, but said “it does not correct the problem of oversupply in the EU ETS, and as such is insufficient to put the System on the right track once and for all”.

According to the UK report, a combination of cause resulted in the current surplus of 2.1 billion permits pushing down EU carbon prices: “overlapping EU policies to drive emissions reductions, the drop in industrial production during the economic downturn, an insufficiently ambitious 2020 target which is out of line with the least cost pathway to achieve 2050 emissions reductions goals, and the influx of credits from international projects”.

The EU Commission’s proposal for fixing the EU ETS is currently under discussion among EU 28 Members. It involves introducing the market stability reserve (MSR), a tool to regulate market supply,  starting from 2021. In the past weeks Germany proposed to start the MSR in 2017 and to move the 900 million allowances delayed from sale under the short-term back-loading initiative directly into the reserve, rather than reintroducing them into the market starting from 2019, as the current regulation provides for.