It is an equation with two unknowns – the degree of balance and the political will to succeed – that European environment ministers will need to solve when they meet in Brussels on Tuesday 28 February to try to reach general guidelines from the Environment Council on the planned reform of the European carbon market, the Emissions Trading System (ETS) for 2021-2030 (see EUROPE 11732).
They will need to strike a balance between three aspects – strengthening ETS to get the price of a tonne of carbon to rise so that the ETS can play its role of encouraging low-carbon investment; protecting high-energy consuming companies from carbon leakage, international competition and the targeting of free quotas; and solidarity mechanisms to help low-income member states (with a GDP of below 60% of the EU average), in particular and the European Fund for Modernisation of the Electricity Sector in these countries.
A diplomatic source said that most member states have taken a position in the perspective of agreement but it is not certain that they would actually back a deal. The question remains about how Poland will vote, and also the vote of a number of the Fund for Modernisation beneficiaries, but these countries are not enough to form a blocking minority among themselves alone. Whether an agreement will be reached will therefore depend on the balance between the three pillars, said the source.
EU’s credibility at stake. The search for a balance underlies the Maltese Presidency’s draft compromise, which will be submitted to the ministers for approval and is certain to be amended. Climate defence NGOs warn that it’s a ‘minimalist’ compromise. They have already warned that the EU’s credibility in terms of implementing the Paris Climate Agreement will be at stake at the Council on Tuesday.
The negotiations look set to be tough because nothing will be decided without agreement on the whole package and over-and-above the balance that it being sought, they will need to strike harmony in the delegations’ discordant views. By and large, the member states are divided into three camps.
The ambitious camp comprises France, the United Kingdom, Denmark, Sweden, the Netherlands, Luxembourg, Portugal, Slovenia and Belgium. These delegations say the signal of prices on the carbon market is a key element of any agreement in terms of an overall package. This is a hefty challenge because the price has fallen to €4 a tonne (compared with €30 a tonne in the European Commission’s initial calculations in 2008) and there’s 1.8 gigatonnes of surplus on the market.
France, Luxembourg, the Netherlands and Sweden want to scrap quotas that have been in the market stability reserve (MSR) for more than five years when the MSR contains more than 500 million tonnes of carbon dioxide entirely. This coalition of the highly ambitious could form a blocking minority if these countries don’t win a boosting of the carbon market by a price signal, warned a diplomatic source ahead of the Council meeting.
The European Parliament voted to double the reserve’s capacity and cancel 800 million-worth of excess quotas in a single blow. The source said that the ambitious countries’ proposal would be more effective because a case-by-case cancellation wouldn’t work and a perennial means is needed to solve the problem of the structural surplus.
France has favoured a ‘corridor’ of carbon prices (a range of prices) from the start of the negotiations, but has not been able to win this (see EUROPE 11418). It is prepared to agree to a political agreement as long as it wins its desires for a boosting of the ‘carbon price’ signal.
Countries wanting a drop in the proportion of quotas up for auction in order to boost the proportion of free quotas for industries at risk of carbon leakage include Germany, Austria, Belgium, Italy and Greece.
Between the above two camps is the Czech Republic, which combines a range of demands from the first two camps.
The camp of delegations very interested in a solidarity mechanism and rather hostile to a fall in the proportion of quotas put up for auction and to price signals include Poland, Hungary, Romania and Bulgaria. So far, the battle has been over the organisation criteria for the Fund's government, in other words the EIB’s presence on the Fund’s board, its association in the organisation of calls for tender and the ‘low-carbon’ criteria for selecting projects to be financed. Beneficiary countries want the Funds’ financing to be allocated flexibly. Poland, in particular, has indicated in writing that the Fund must be able to finance improvements in the electrification of transport, renewable energy, geothermals for the generation of heat and air quality. (Original version in French Aminata Niang)