Brussels, 06/05/2015 (Agence Europe) On Tuesday evening 5 May, a decisive step was made towards the structural reform of the EU's Emissions Trading System (ETS), which seeks to rectify the current imbalances between supply and demand on the European carbons market.
Negotiators from Parliament, the Council and Commission managed to reach a principled agreement on the setting up of a market stability reserve that will be up and running on 1 January 2019, two years earlier than the date proposed by the Commission (see EUROPE 11308).
This agreement still needs to be confirmed by Coreper on 13 May and by the Environment Committee at the EP on 26 May, before the plenary session can give its opinion in July on whether to give the go-ahead for the adoption of the Council of the EU's text. This decision has already provoked a number of significantly contrasting reactions.
The rapporteur leading the negotiations on behalf of the Parliament, Ivo Belet (EPP, Belgium) said: “We have struck a good balance between an ambitious and effective reform of the ETS and strong guarantees for European energy-intensive industry to prevent carbon leakage… This agreement provides sufficient guarantees to these companies to prevent them from being obliged to delocalise their production facilities to countries outside the EU that have less stringent climate policies”. Giovanni La Via (EPP, Italy), the chairperson of the Environment Committee asserted, “we have made a clear commitment to tackle the possible risk of carbon leakage, particularly within the context of the future reform of the ETS”.
In addition to the early start-up of the stability reserve on 1 January 2019, the agreement calls for:
900 million “backloaded” allowances frozen last year will be placed on the market reserve instead of reintegrating the market in 2020. Around 600 million non-allocated (reserved for new market entrants or coming from industrial installations that have been closed down) will be paid into the reserve after 2020 and their future usage will be determined within the context of the ETS review;
allowances that are allocated to Central and Eastern European countries as part of the solidarity between EU member states (these “solidarity allowances” account for 10% of the annual quantity of allowances) will not be paid into the reserve until 2025;
to promote innovative low carbon emissions projects, the Commission is expected to set up (as part of the draft ETS review expected this summer) an innovation fund for 50 million allowances;
the ETS review and stability reserve will have to take into account situations where companies are genuinely exposed to the risk of carbon leakage (delocalisation), as well as questions involving the competitiveness of European industry, employment and GDP.
The steel industry is concerned and according to EUROFER, the early start up of the reserve, combined with the direct payment into the reserve of frozen allowances that should have been auctioned in 2019 and 2020 is likely to increase carbon prices, “significantly already before 2021”; this means EU steelmakers will face even tougher times with regard to their international competitors, which do not have to face similar CO2 costs. The steel industry has been facing great difficulties since the beginning of the crisis in 2008 and Axel Eggert, the director-general of EUROFER, warned: “Any additional costs not borne by our competitors outside the EU may have disastrous effects on our industry, employment and, in the mid and long term, on the EU's major manufacturing value chains and the EU economy as a whole, of which the steel industry is an essential part”. He also said that “Based on this decision to alter the fundamentals of what should be a purely market-based EU Emissions Trading Scheme, it is now time for the EU institutions to take full responsibility for the EU industry's competitiveness by adopting clear and long-term carbon leakage measures as soon as possible”.
EWEA and Carbon Market Watch say it must go further. The European Wind Energy Association (EWEA) welcomed the substance of the agreement, whilst pointing out that the member states and Parliament could have been much more ambitious. Ivan Pineda, a director at the EWEA, stated: “Member states and the Parliament could have been far more ambitious in the shakeup of the carbon market and a much more comprehensive reform is needed in order for this instrument to provide a meaningful signal to investors”.
Carbon MarketWatch welcomed this agreement but remained cautious. Although the NGO welcomed it as a first step to rectify the shortcomings in the ETS, it emphasised that it was absolutely imperative that the ETS review tackled surplus allowances on a permanent basis. Femke de Jong, speaking on behalf of the NGO, asserted: “European policymakers have come to the rescue to salvage the EU ETS from drowning in a huge oversupply of emission allowances. With this deal around 2 billion surplus pollution permits will be prohibited from flooding the carbon market by 2020”. He also pointed out that if this agreement goes through, “This is expected to result in a stronger carbon price signal to make the polluter pay and reward climate friendly investments in Europe, it does not ensure that the EU's future climate targets are met by actual emission reductions rather than with surplus emission allowances”. Therefore, Carbon Market Watch is calling on the European Commission to use the opportunity of the ETS review to introduce automatic removals of any allowances that remain unused at the end of each trading period. (Aminata Niang)