Parliament rubber-stamps EU carbon market reform

The EU's carbon market covers around 12,000 industrial and power installations. [Shutterstock]

European lawmakers voted in favour of a deal to reform the EU’s carbon market after 2020 on Tuesday (6 February), as well as bolstering prices in the bloc’s flagship tool for reducing greenhouse gas emissions.

The new rules for the EU’s Emissions Trading System (ETS) were agreed in November after months of negotiations between the European Parliament and EU member states but still needed official approval by the Assembly.

535 were in favour of the deal piloted by British Conservative MEP Julie Girling, with 104 against and 39 abstentions. Member states will now also have a final vote on the ETS update, seen as a rubber-stamping exercise.

Modest price increase

European carbon prices have risen 15% since negotiators first struck the deal in November and were trading at around €8.90 per tonne after the vote, a price critics say is still too low.

The EU’s cap-and-trade system suffers from too many permits, making it inefficient. The reform deal seeks to strike a balance between being ambitious and avoiding energy-intensive industries moving abroad to avoid regulation.

It will double the rate at which the scheme’s Market Stability Reserve (MSR) soaks up excess allowances, as a short-term measure to beef up prices.

In 2023, a new mechanism to limit the validity of allowances in the MSR will be put in place.

The overall cap on the total volume of emissions, known as the linear reduction factor (LRF), will be reduced annually by 2.2%.

Emissions trading deal fails to impress

EU negotiators from member states and the institutions reached a compromise on an Emissions Trading System (ETS) reform early on Thursday (9 November). But green groups have criticised the deal for ditching flagship climate policy status for a fossil fuel subsidy.

The European Union aims to cut greenhouse gas emissions by at least 40% by 2030, as part of the overall Paris Agreement to avoid the worst consequences of climate change.

As things stand, the ETS reform has only one more hurdle to clear but a recent plan floated by EU Budget Commissioner Günther Oettinger on how to plug a €13 billion hole left by the UK after Brexit suggests the tinkering might not be over.

The German official said that shifting income generated by the ETS from national to EU level could help top up the bloc’s coffers, adding that the legislation is already located at supranational level.

MEP Girling warned that the idea could prove to be “politically toxic” given the effort needed to broker the final deal but added that she could support changing the ETS again if the income generated were set aside for climate action efforts.

Plastic tax and ETS tinkering could plug Brexit hole, suggests EU budget chief

EU Budget Commissioner Günther Oettinger has revealed that the European Commission will propose taxing plastic and shifting emissions trading income to EU level, in an attempt to balance the bloc’s coffers once the United Kingdom leaves the EU.

Positions

Julie Girling, a British MEP for the European Conservative and Reformist (ECR) group, is the European Parliament rapporteur on the ETS reform. She said:

"We have done our best to agree an ambitious update. The ETS has had many detractors over the years. We tackled many problems – from a carbon price that was clearly too low to make the market function to the extremely difficult issue of striking the balance between our environmental ambition and the protection of energy-intensive European industry.”

The centre-right European People's Party (EPP), the largest group in Parliament, said the vote marked "a historic day" for the EU's climate policy.

Thanks to this reform, we can take the ETS to the next level: instead of reducing our emissions by 38 million tons a year, from 2021, we will reduce them by 50 million tons a year. This is equal to closing down three large coal-fired power plants", stressed Ivo Belet MEP, the EPP Group’s negotiator on the file,

According to the EPP, the agreement on the ETS reform is "truly ambitious yet realistic and feasible at the same time" because it "protects the competitive situation of the European industry" and will help the EU’s Central European Member States to upgrade their energy systems, via the Modernisation Fund.

"This is not the fossil-free industrial shock therapy that some parties in Parliament wanted, but a realist and gradual transformation of our economy. It is fair to SMEs and the more industrialised countries, and will allow Europe to deliver on our Paris commitments", added Esther de Lange MEP, EPP Group Spokeswoman in the Parliament's Industry Committee.

The Socialists and Democrats (S&D) in the European Parliament said the ETS reform was "a crucial tool to help EU industry to adapt to a zero-carbon economy" and meet the EU's pledges under the Paris Agreement. But they insisted that the ETS was not an end in itself.

"Hopefully, with a successful transition towards a zero-carbon economy, the allowances in the market will eventually be no longer necessary," said Miriam Dalli, a Maltese MEP who is S&D spokesperson on environment.

S&D spokesperson on the ETS, Jytte Guteland MEP, said: "The agreement reached with the Council will greatly help reduce the current surplus in the system by cancelling up to 2 billion allowances over the years to come. We also ensured that no new coal would be financed by the common fund for modernisation."

"The agreement also upholds the fundamental principle that all sectors of society must contribute in the fight against global warming, with a clear signal that the maritime sector will also have to do more. For the S&D Group it has also been crucial to ensure a just transition to a low-carbon society. Whilst Europe accelerates the pace to combat climate change, it is important to avoid social impacts and to ensure that nobody is left behind."

Commenting on the Linear Reduction Factor (LRF), Jytte Guteland said the S&D wanted to be more ambitious and set it at 2.4% but failed to get support from the centre-right EPP and conservative groups in Parliament. In the end, the LRF was set at 2.2% "However, we managed to introduce a mid-term revision in which we will try to increase the percentage.”

Bas Eickhout, a Dutch lawmaker from the Greens/EFA group, was hardly enthusiastic about the ETS reform deal.

"The changes approved today have already helped to push prices up from the paltry €5 per tonne we had a year ago, but won't bring us anywhere near the level needed to meet our Paris climate agreement commitments. Member States now have a duty to come up with national policies to boost the carbon price, for example by introducing national minimum prices that lie above the current ETS price."

“While the existing rules placed a limit on Member States’ ambitions, the new measures offer a window of opportunity. Thanks to the insistence of the Greens, EU governments can now shut down coal plants without having to pass the CO2 on to other sectors. I hope that national governments will see the potential in leading the energy transition and will seize this opportunity to quicken the pace of change.”

Background

The EU's Emissions Trading System is the world’s biggest scheme for trading emissions allowances. Regulated businesses measure and report their carbon emissions, handing in one allowance for each tonne they release. Companies can trade allowances as an incentive for them to reduce their emissions. Countries can also sell permits to the market.

The European Commission has proposed a series of reforms to the ETS.

Pollution credits were grossly over allocated by several countries during the 2005 initial implementation phase of the ETS, forcing down carbon prices and undermining the scheme's credibility, which prompted the EU to toughen up the system. Carbon prices have since remained stubbornly low at under €8 a tonne.

The proposed reform proposes tightening the screw on heavy polluters by restricting the amount of pollution credits available in the period 2021-2030.

Further Reading

Emissions Trading System failures sour energy policy efforts

Doubts about the effectiveness of the European Union’s Emissions Trading System (ETS) resurfaced on Tuesday (19 September) at an energy conference in Estonia, as a low carbon price continues to stymie energy market efforts.

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