EU ministers reach compromise on carbon market reform

19 of the EU's 28 members backed the deal. [Petr Štefek/Wikipedia]

EU ministers reached a compromise on reforms to the carbon emissions market yesterday (28 February), moving the European Union closer to adopting rules that are crucial to reducing greenhouse gas emissions in line with the Paris Agreement on climate change.

Eager to maintain its leadership on climate change diplomacy, EU environment ministers sought to bridge divisions over how to balance environmental ambitions with protection for energy-intensive industries in reforming the Emission Trading System (ETS).

The agreement, brokered by Malta holding the rotating presidency of the EU, means negotiations with the European Parliament can now begin with the aim of reaching an agreement on a final text.

MEPs voted on amendments to the European Parliament approach earlier this month. With both sides having now established their respective positions, negotiations can begin in earnest.

European Parliament adopts draft reform of carbon market

The European Parliament on Wednesday (15 February) adopted draft reforms of the EU’s carbon market post-2020 that aim to balance greater cuts in greenhouse gases with protection for energy-intensive industries.

The cap-and-trade permit system is the EU’s flagship policy to meet its goal of cutting greenhouse gas emissions from 11,000 energy-intensive industrial plants and power stations by 43% by 2030 when compared with 2005 levels.

But the market has suffered from an excess supply of permits since the financial crisis, which depressed prices.

Talks on reforms have dragged on for 18 months, with EU nations split over measures to strengthen prices, how not to impinge on competitiveness and how best to manage funds to help those lagging behind to modernise their economies.

“The negotiations have been going on all day; every country has had to compromise on something,” Italian minister Gian Luca Galleti told colleagues after the vote, saying Rome was still unhappy with some aspects of the deal.

Poland’s minister said he felt “cheated” by the deal, which 19 of the bloc’s 28 nations supported. Nine nations voted against it.

A text of the compromise seen by Reuters calls for measures to strengthen prices by doubling the rate at which the scheme’s Market Stability Reserve (MSR) soaks up excess allowances and by cancelling surplus permits yearly after 2024 that have been three years in the reserve, above a ceiling of 650 million.

The deal also offers a cushion for industries worried about being short on allowances if a cap is triggered on overall allocations that slashes free allowances across the board, known as the cross-sectoral correction factor (CSCF).

Under the current ETS trading phase, which runs from 2013 to 2020, the majority of carbon permits are sold through government auctions, with most of the remainder given free to industry.

Tuesday’s deal calls for an additional 2% of the permits due to be auctioned to instead be freely doled out to industry if the CSCF is triggered.

“We are very happy that the council really showed the ambition that we need if we are going to stick to the Paris target,” Swedish climate minister Isabella Lovin told Reuters after the vote.

“I think the world needs climate leadership right now.”

Sweden, France and the Netherlands have led a push for measures to shore up permit prices, and reached a breakthrough at the start of talks when they won Germany’s support.

Germany, Italy, Austria and Greece, meanwhile, have prioritised measures to ensure that regulation does not drive big industry abroad, such as the provision for a more flexible auction share.

Poorer, coal-reliant nations in Central and Eastern Europe are keen to get the most generous provisions possible to help modernise their economies.

A minimum of 16 member states is required to back the compromise deal, representing at least 65% of the total EU population.

EU countries need a common position before beginning talks with the European Parliament and the European Commission to finalise EU legislation on the reforms tabled by the Commission more than a year ago.

The European Parliament last week adopted draft reforms of the carbon market that will go to plenary vote later this month.

Commenting on the results of the meeting, the Climate Action Network said the deal, while slightly better than expected, is far too weak to repair the broken scheme or align the EU’s planned emission reductions with the global temperature goals it committed to under the Paris Agreement.

EU carbon market at risk of another lost decade

Next week, EU environment ministers are to strike a deal on the reform of the Emissions Trading System (ETS). If governments do not treat the reform with more seriousness, the EU risks setting its carbon market up for another decade of failure, argues Wendel Trio.

“Ministers recognised that the Paris Agreement requires scaling up emission cuts. By comparison to where we started the reform process, today’s decision is a small step in the right direction,” said Wendel Trio, director of CAN Europe.

But “ministers will have to come back to the table soon to revise the ETS again. Within the next few years, the EU will need to revise its pledge under the Paris Agreement. Then EU member states will have to redo this exercise and ensure a real reform of the ETS to contribute to greater climate action overall,” he added.

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