EU countries stall over carbon market reform
Brussels December, 22nd 2016
After more than a year of negotiations, EU member states have come up short in their efforts to find common ground on a carbon market reform seen as necessary if the ambitions of the Paris Agreement on climate change are to be met.Meeting at the final ministerial council chaired by the outgoing Slovak presidency yesterday (19 December), environment ministers appeared at odds over the planned reform of the Emissions Trading Scheme, the EU’s main tool to fight climate change and reward clean energy.
Negotiations kicked off more than a year ago but despite a big push by the presidency, there has been a “lack of political will” around the European Commission’s initial proposal, said László Sólymos, the Slovak Environment Minister who chaired the meeting.
“Everyone agrees that carbon prices must go up,” Climate Commissioner Miguel Arias Cañete said at the beginning of the meeting in an attempt to find a consensus.
That turned out to be somewhat of an optimistic comment though, when Poland’s environment minister retorted that the price of CO2 “should not be influenced by the stability reserve”, the EU Commission’s proposed tool to manage the amount of carbon permits on the market and keep prices high.
“We still need to discuss this,” said Jan Szyszko, Poland’s environment minister.
Warsaw warned that EU member states “have not understood the spirit of the Paris Agreement”, saying each country should be allowed to go their own way with their own national legislation on climate change.
The other member states were less vehement in their criticism but rallied against the Commission’s plan nonetheless.
Call for simplicity
EU countries seem to converge on their rejection of the Commission’s proposed “cross-sectoral correction factor (CSCF)”, a mechanism that would distribute free allocations to the top 10% of industry performers in terms of CO2 reductions.
The Commission’s proposal was generally seen as too complicated, with a majority of member states arguing for more straightforward market regulation instruments.
“We must avoid using this system and strengthen the carbon market with simple tools,” said Dutch minister Sharon Dijksma. “If we fall behind with a market that does not work, we are going to harm our children and our grandchildren,” she said.
Other market reform proposals, including the total number of allowances that should be auctioned off, as well as the method for calculating the total number of allowances, are still being debated.
French environment minister Ségolène Royale, who unlike her German counterpart Barbara Hendricks rarely attends these meetings, sent representative Alexis Duterte in her stead, who said that “it is not normal to persevere with a system that distributes too many and too generous free allowances”.
“It is a triangle,” Cañete replied. “We must take measures to strengthen the carbon market,” he argued, but also protect against the risk of industry delocalisation associated with CO2 constraints and put in place a modernisation fund that will assist with the decarbonisation of the economy.
The Climate and Energy Commissioner challenged EU countries to reach a consensus, and pointed to a vote in the European Parliament’s environment committee last week. “If an agreement can be reached in the European Parliament, then the member states can find one too,” the Spaniard argued.
If member states broadly agree to strengthen the stability reserve, by putting aside more allowances, they remain divided over the pace at which it should be done.
Germany, France, the Netherlands and Sweden back the Parliament’s current position of a 2.4% reduction per year, with 57% of allowances auctioned. But other member states, particularly in Eastern Europe, want a slower reduction rate and lower number of allowances to be auctioned – a proposal heartily backed by the steel lobby Eurofer.
Given the persisting differences between member states despite long negotiations, it seems unlikely that the more ambitious countries will be able to convince the proposal’s detractors without making further concessions.
Those could include an increase in carbon market funds that would ultimately benefit countries that are less advanced in the energy transition.
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.
Under the Commission proposal, 57% of allocations will be auctioned by member states, the same as in the current trading period (2013-2020). They are estimated to be worth €225 billion. 43% (6.3 billion allowances) will go to industry in free allocations, worth an estimated €160 billion. Those will be divided out, with the most efficient companies being prioritised. So the best performing companies will still get the benefit of free allowances.
177 sectors currently qualify for free permits. About 100 will drop off the list for 2021-2030. They are likely to be those that qualified because of their trade intensity rather than their emissions intensity.
The list will stay the same for ten years, rather than the five years of the previous trading period. This will make it more stable and give greater investor certainty. The new system will take into account production increases and decreases more effectively, and adjust the amount of free allowances accordingly. A number will be set aside for new and growing installations.