The European Parliament approved a proposal to begin reform of the world’s biggest carbon market in 2019, clearing the last major hurdle before the plan can become law.
EU carbon allowances, at around €7.50 per tonne, were little changed after the vote, which had been expected.
Discussions have dragged on for months over the proposal to begin operating a Market Stability Reserve (MSR) to remove some of the surplus of carbon allowances that has depressed prices on the EU’s Emissions Trading System (ETS).
The text negotiated with the Council, representing the 28 EU member states, was approved by 495 votes to 158, with 49 abstentions, the Parliament said.
Ivo Belet, a Belgian from the centre-right European People’s Party, who has steered the debate in Parliament said the vote was “an extremely important step” and had strengthened the credibility of the European Union ahead of climate talks in Paris at the end of the year.
“This reform puts Europe on the right track to achieve its ambition of 40% less CO2 emissions by 2030,” compared to 1990 levels, he said in a statement.
“The Greek crisis is so urgent that it puts everything else aside, but climate is something that cannot wait,” he said in a debate early this week.
Following the vote in a plenary session of the Parliament in Strasbourg, the reform only requires a sign-off from member states to become EU law.
It involves setting up a Market Stability Reserve to store surplus carbon allowances that have piled up due to oversupply and economic slowdown.
The reserve also could release the pollution permits in the event of higher demand.
Jos Delbeke, director general of the European Commission’s climate action department, said as many as 1.6 billion allowances could be removed from the market where a surplus of them has depressed carbon prices. There are currently 2 billion allowances in excess on the market, according to the Parliament.
Energy intensive industries
Agreement was complicated by Poland, whose economy relies heavily on coal, the most carbon-intensive of the fossil fuels. It led opposition to any action before 2021, the reform date initially proposed by the Commission.
Energy-intensive industry also raised concerns that reform before then would increase their costs and could drive investment into other areas of the world, a shift known as carbon leakage.
Dow Chemical, for instance, says energy-intensive industries must continue to receive 100 percent free allowances up to an EU benchmark to cover its exposure to the ETS.
“For energy-intensive industries (steel, chemicals, glass, etc.) achieving less CO2-emissions is a daunting task and requires important investments,” said Ivo Belet.
“We need to ensure sufficient guarantees to these companies to prevent them from delocalising their production facilities to countries outside the EU that have less stringent climate policies (‘carbon leakage’). This will be a crucial element in the next step of the ETS reform, which the European Commission will present next week,” added Mr Belet.
Rewarding best practice
To reward best practice, the Commission, the EU executive, uses a benchmarking system that gives free allowances to cover 100% of emissions costs for top-performing installations.
Proposed post-2020 market reforms will include a reassessment of how free allowances are awarded and are expected to be published in Brussels on 15 July.
According to a draft seen by Reuters, 400 million allowances will be sold to raise revenue for an innovation fund for low-carbon technologies.
Non-government organisations say the proposals give too much to business and nations such as Poland.
The plan got the green light in May from the EU’s executive, and member states.
In Parliament, the centre-right European People's Party (EPP) hailed the vote on the Market Stability Reserve (MSR). "We have managed to strike the right balance between industry and climate policies, which should be mutually reinforcing," said Antonio Tajani MEP. "The EPP Group has obtained important safeguards for industry. Strong carbon leakage provisions and adequate thresholds for the activation of the MSR will allow industry to adapt to the new system without additional costs. On top of that, backloaded allowances will not be lost but put in the reserve."
The Greens/EFA group said the ETS reform was "a rare piece of good news for the EU carbon market". But it said more measures were needed to put the market back on track. "MEPs today made the MSR more effective in the short term by transferring into the reserve the glut of carbon emission allowances that would otherwise have flooded the market in 2019 and 2020," said Bas Eickhout, a Dutch MEP who acts as the Green's climate change spokesperson in Parliament.
"It is important to note however, that the MSR will not be a permanent fix to the enormous surplus in the EU ETS, which will, if left unaddressed, undermine the integrity of future climate targets," Eckhout added, saying next week's Commission proposals for the post-2020 trading period will be crucial. "For it to be effective this review must include provisions for permanently removing some of the surplus from the market," Eckhout said, with an eye on the EU's 2030 objective of reducing emissions by 40%.
The Socialists & Democrats (S&D) group also welcomed the decision, saying it successfully pushed to bring forward the start date of the reform from 2021 to 2019.
"The EU-ETS needs fixing urgently," said Matthias Groote, a German MEP who is the S&D spokesperson on climate change. "The introduction of the Market Stability Reserve will send a strong signal to the markets and already begin to influence long-term investment decisions, avoiding costly mistakes and technology lock-in," he said. "Socialists and Democrats want stability and predictability in the ETS."
With a turnover that reached around €90 billion in 2010, the EU's Emissions Trading System is the world's largest carbon market. Around 80% of it is traded in futures markets and 20% in spot markets.
The ETS aims to encourage companies to invest in low-polluting technologies by allocating or selling them allowances to cover their annual emissions. The most efficient companies can then sell unused allowances or bank them.
But carbon prices are currently far too low to provide that incentive, with prices currently hovering at €5 per tonne, below the €20 or €30 analysts believe is needed to make utilities switch to lower carbon energy generation.
To deal with the issue, the European Union has approved a "backloading" plan, which seeks to delay the sale of 900 million carbon permits until later this decade and prop up carbon prices.
The European Commission’s latest proposal is to establish a "market stability reserve" of carbon permits to curb supply in the ETS.
- 15 July 2015: European Commisison expected to propose a reassessment of how free allowances are awarded
- Sept. 2015: EU Council of Ministers expected to rubber-stamp the agreement, turning it into law
- 30 Nov.-11 Dec.: 21st session of the Conference of the Parties to the UNFCCC, in Paris
- 1 Jan. 2019: Start date for Market Stability Reserve
- 2020: Phase IV of ETS due to begin
- Press release: Parliament adopts CO2 market stability reserve (8 July 2015)
- ETS reform: everything you need to know in a nutshell (6 July 2015)
- EPP: Green light for far-reaching reform of CO2 Emissions Trading System (8 July 2015)
- S&D: ETS: The Stability Reserve is the first urgent measure to reform the Emissions Trading System (8 July 2015)
- Greens/EFA: More measures needed to put EU carbon market back on track (8 July 2015)