Luxembourg, 26/10/2015 (Agence Europe) - EU environment ministers have once again expressed their full support for the EU emissions trading scheme (ETS) as a key instrument in the fight against climate change. Meeting in Council in Luxembourg on Monday 26 October, ministers held their first policy debate on the proposal for the long-term revision of the ETS to increase its effectiveness.
However, this initial exchange on the proposal brought forward by the European Commission in July for the reform of the instrument for the period from 2021 to 2030 made it very apparent that free quota allocation to prevent carbon leakage from the countries most exposed to this risk and to international competition from countries whose climate targets are less ambitious will be the crucial issue in future discussions.
Several member states have yet to complete their evaluation of the Commission proposal which seeks to put in place a legal framework so that the principles established by the European Council of October 2014 can be put into effect. The proposal makes provision for a 43% reduction in emissions from the ETS sectors (industry, energy), the auctioning off of 57% of quotas with 43% being allocated free of charge under a binary approach: the free allocation will be 30% or 100% (see EUROPE 11360).
Delegations were called on to say: - whether the proposed rules for continuing free allocations maintain the correct balance between two necessities: that of preventing carbon leakage (risk of relocation) from the energy intensive industries that would threaten the competitiveness of European industry and the need to provide greater incentive to innovate in the transition to a low-carbon economy; - whether the funding mechanisms (innovation fund and modernisation fund) that are supposed to bolster industrial innovation and modernisation of the energy sector provide sufficient encouragement to the public and private investment needed if the EU's climate target for 2030 is to be reached.
Drawing the political conclusions from the discussion, Carole Dieschbourg, president in office of the Environment Council, highlighted two points. The proposal had been welcomed by delegations as it is felt to be an essential step towards beginning the work of how the target of at least a 40% reduction in greenhouse gases by 2030 that the EU set itself last year is to be achieved. “The ministers are as one in their belief that the ETS, backed by the renewables and energy efficiency directives, is the cornerstone of climate policy and we take our commitments in the fight against climate change very seriously”, she stated (our translation throughout).
Free allocations/carbon leakage. Several delegations (France, United Kingdom, Czech Republic and Slovakia) would prefer a more targeted and more progressive approach better able to manage the risk to ensure that free quotas are, indeed, of benefit to the companies which genuinely face the most severe risk of carbon leakage and international competition. According to their calculations, under the Commission's proposal, 93% of the facilities covered by the ETS could claim free quotas. “It's the industries least at risk that will benefit the most”, argued the representative of the UK secretary of state for the environment and energy. Climate Action and Energy Commissioner Miguel Arias Canete stressed at the outset of the discussion that the countries had to make their views known on this issue on which a position paper had been circulated. This suggestion won the backing of other delegations.
The Visegrad Group felt that the stability reserve agreed last year, where 900 million surplus quotas would be held back, was not compatible with the operation of a market instrument and hampered predictability. They want to await the outcome of COP 21 to see whether they guarantee a level playing field for all and to build this outcome into the ETS reform. Several delegations argued that greater account should be taken of the specific nature of their sectors and installations.
Arguing that “the carbon price is crucial because it demonstrates that we are backing up our words with actions”, French Environment, Ecology and Sustainable Development Minister Ségolène Royal, whose country will host COP 21, underlined the need to be “more offensive and effective on carbon prices” at COP 21. She urged that “it be included in the revision of the ETS directive that changes in carbon pricing worldwide will be taken into account in upward alignment”. She set out the five instruments that will bring an effective carbon price: a carbon price corridor; extending the carbon price to all sectors (including building and transport); increasing green investment by sharing the best practice in the various member states; ending fossil fuel subsidies; making the carbon price debate part of COP 21.
Part of auction revenue providing funding in third countries. No matter how hard Dieschbourg tried to get across the view that “the level of ambition and the funding of climate action in vulnerable third countries is key to the success of COP 21 in Paris”, several delegations were determined that allocating revenue from the auction of quotas is a matter of national sovereignty. The Polish minister felt this financing provision to be “superfluous” because “we fail to see the connection with the internal mechanism that is the ETS”. The Slovenian delegation representative, on the other hand, started that her country was planning, for the first time in 2016, to use the auction revenue to invest in vulnerable countries.
Modernisation and innovation funds. Numerous delegations (particularly those of the Central European countries and Lithuania) argued that the modernisation and innovation funds should not be used just to support renewable energy and energy efficiency projects but should help all innovative industrial technologies and energy-intensive industries, such as carbon capture and storage (which is backed by the United Kingdom, too) and that small-scale projects should be eligible for funding (a request also made by Slovenia and Italy).
Commissioner Canete noted that the Commission proposal is “more evolution than revolution”, that it “allows 100 years to decarbonise the economy, rewards innovation, increases predictability for industry and cuts red tape”. In Council, discussions will continue to try to find a better balance to this proposal that is generally seen as sound basis for negotiation on reforming a pillar of EU climate policy. (Original version in French by Aminata Niang)