European businesses split over urgency of EU carbon market fix

Climate campaigners. London, 2009. [Takver/Flickr]

European business groups are sharply divided over how quickly and aggressively the European Union needs to reform its Emissions Trading System (ETS), a division unlikely to help spur swift changes.

The European Commission has proposed that starting in 2021, it set aside hundreds of millions of surplus carbon allowances from the ETS to help firms cope with economic shocks, and drive carbon prices up to levels that encourage them to invest in lower carbon technologies.

Germany is broadly in favour, but Poland opposes the so-called market stability reserve (MSR) bill. Few other countries have taken sides. Talks are at an early stage, and lawmakers face mounting lobbying efforts as they grapple with the details.

Progress on the bill is being closely watched by carbon market participants, as analysts say the reserve could add around 11 euros to carbon prices, which fell 5.5% on 23 September, as the news that the European Parliament would not vote on it until February dashed hopes of a quick deal.

BusinessEurope, which represents business federations in all EU states, is against adopting the MSR without first having the Commission publish a legislative proposal to shield industries from foreign competitors in countries with looser environmental regulations, said Alexandre Affre, BusinessEurope’s director for industrial affairs.

“With the MSR we have only one side of the coin … At the same time we would like a full reform of the ETS that takes on board carbon leakage measures post-2020,” he told Reuters.

The stance is at odds with other business groups and Germany, which want the MSR to start several years early.

Early start

Analysts say that an early start would be impossible, because it would get bogged down in the more complex legislation involving carbon leakage.

Earlier this week, a smaller group of investors, power companies and technology companies, including Philips and Unilever, called for an early structural reform of the ETS, which they say will help drive Europe’s economy, by providing more certain investment conditions.

Germany wants to strengthen the reserve proposal by starting earlier in 2018, and by putting 900 million permits currently being temporarily withheld under the EU’s seperate backloading measure directly into the reserve.

Putting those permits directly into the reserve would maintain carbon prices above 10 euros a tonne, and prevent them slipping back to current levels near €6 later this decade, according to Thomson Reuters Point Carbon data.

BusinessEurope oppose the move, saying it would harm businesses that have already made investment decisions based on laws agreed up to 2020.

“Things have been fixed up to 2020 we should not change the rules,” said Affre.

But the group appears to be not entirely united.

The UK’s Confederation of British Industry (CBI), one of BusinessEurope’s national member federations, said it supported Germany’s idea for the backloaded permits.

“To ensure a smooth transition to this regime, the allowances due to be returned to auction through backloading in 2019-20 should be placed in reserve rather than returned to auction,” the group said this week in a policy document.

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.

>> Read: Europe opts for ‘auto-backload’ of carbon markets

  • Oct. 2014: European Council expected to agree 2030 climate and energy targets
  • Dec. 2014: UNFCCC Climate Summit in Lima, Peru
  • Dec. 2015: UNFCCC Climate Summit in Paris expected to agree outline of global legally-binding climate treaty
  • 2020: Deadline for EU to meet target of 20% greenhouse gas reduction as measured against 1990 levels, a 20% share for renewable energy in the bloc's energy mix, and a non-binding goal of a 20% energy efficiency improvement, measured against 2005 levels

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