How an ambitious and rapid reform of the EU-ETS is essential to achieve the new climate objectives

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Alexandre Perra. [EDF]

2021 is a decisive year for climate action. Following the binding objective of carbon neutrality in the Climate Law, it is now urgent to align the various legislative texts with this ambition.

Alexandre Perra is the EDF’s Group Senior Executive Vice President in charge of Innovation, Corporate Social Responsibility and Strategy.

The first deadline is fast approaching: by 2030 a target of at least 55% reduction in greenhouse gas emissions compared to 1990 must be achieved. The carbon price has a key role to play in the ‘Fit for 55’ package and EDF encourages the Commission to seize all the tools available to strengthen the ETS: rebasing, linear reduction factor and MSR.

The implementation of a safety net in the form of a price floor or corridor would in addition provide investors with long-term visibility. The introduction of a carbon price signal to other sectors such as buildings and transport is crucial, but it should not slow down the revision of the current EU-ETS. Every year lost makes decarbonisation more expensive.

Rebasing, linear reduction factor, MSR, price floor: activating all the levers for an ambitious reform

For the power sector, the current level of €50/tCO2 allows existing gas-fired power plants to be operated rather than their coal-fired equivalents. A price of €60-70/tCO2 in 2030 would allow us to go further: that is, accelerating the elimination of coal from the European mix and encouraging investment in low-carbon technologies and, in particular, the development of renewable energy. In any case, the rules of the game must remain stable: the ETS and the way assets are remunerated on the electricity markets should not be called into question at the whim of CO2 price fluctuations.

The forthcoming review of the ETS must reveal a carbon price high enough to drastically reduce emissions. Several levers must be activated:

  • Reducing the number of allowances. To reflect the increase in the target, it is necessary to decrease the number of allowances distributed over the entire 2021-2030 period. The starting point must be aligned with the actual emission level; this is called “rebasing”. The linear reduction factor (LRF) – the annual decrease in the quantity of allowances distributed – will also have to be increased from the current 2.2%, which is consistent with a target of only -40% in 2030.  Rebasing would avoid a sudden increase in the LRF and enable a healthy start to be made.
  • Strengthening the stability reserve. The historical surplus of allowances risks jeopardising the proper functioning of the market and the achievement of the 2030 target if the surplus allowances are kept until the end of the 2021-2030 period. Reforming the stability reserve is therefore crucial to increase the resilience of the system to exogenous shocks.
  • Introducing a safety net. A carbon price floor that increases gradually over time can provide investors with visibility and prevent a further price collapse in the future.. The advantage of such a mechanism is the transparency and predictability that helps investors to move towards low-carbon solutions today.

Timing is of the essence, let’s avoid any delay

Ideally, all sectors should be included in the ETS. However, it is essential to adopt a pragmatic approach that enables the ETS to be reformed as soon as possible while gradually introducing a carbon price in sectors where there is none. The immediate extension of the ETS to the maritime sector is important as these emissions still remain largely unregulated. The introduction of a carbon price in the road transport and building sectors should complement binding targets under the Effort Sharing Regulation (ESR) and sectoral policies that have proven to be effective – such as CO2 standards for vehicles. To avoid slowing down the reform and destabilising the ETS, the introduction of a parallel trading scheme to the existing ETS is a pragmatic approach. The conditions for a possible future link-up will also have to be defined.

Ensuring a fair transition is key

The impact of higher carbon prices on consumers and industries in the different Member States must be taken very seriously. Future reform will need to address the difficult issue of redistribution of ETS revenues and implement adequate measures to ensure a fair transition, particularly in countries with high carbon economies. This transition could be supported by strengthening the tools already provided for in the ETS Directive, in particular the Modernisation Fund and the Innovation Fund.

Is therefore fundamental that all revenues generated by the EU-ETS are reinvested in low-carbon technologies in line with the climate neutrality objective.

 

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