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European carbon market reform Must Succeed in Reality

75464917MC014_TORRENTIAL_RAIn February members of the European Parliament voted to start the reform of the EU’s carbon market by 2019, and put almost 1.4 billion pollution permits that were due to come back to the market by 2020 directly into the new market stability reserve (MSR). Unfortunately the reform does not provide a structural solution for the lacking environmental effectiveness of the EU ETS, as around 800 million surplus allowances are allowed to flow back to the market again before 2030, diluting the EU’s 2030 target by 3%.

The EU’s Emissions Trading System (ETS) is intended to drive Europe’s transition to renewable energy and support low carbon investments, but the current price to emit one tonne of carbon is far too low to do this. The EU’s carbon market is flooded by more than two billion excess pollution permits as a result of the economic recession, an overgenerous use of carbon offsets and the handout of billions of free pollution permits to heavy industry. The MSR is therefore intended to serve as a temporary flood gate to tackle over and under capacity in the system.

The vote last week by Members of the European Parliament (MEPs) prevents almost 1.4 billion allowances from returning to the already heavily oversupplied carbon market, and includes directing the 900 million backloaded allowances and around 750 unused allowances (from closures of existing installations for example) straight into the reserve. At the same time, MEPs voted to return 300 million surplus allowances to the oversupplied market before 2025 to fill an industry innovation fund with unclear low-carbon credentials.

Unfortunately MEPs irresponsibly delayed these necessary reforms until 2019, which comes too late in times of climate crisis. The surplus of pollution permits will grow bigger with each year that the reserve is delayed. Sandbag forecasts the oversupply of pollution permits to reach 4.5 billion by 2020, equal to more than two years of EU emissions.

It is now up to EU Member States to ensure that the ETS rescue comes sooner. The reserve needs to be established by 2017 at the latest which is fortunately what already half of the EU Member States (14 countries) said they will support, even though the position of several important countries like Spain remains unclear.

After the Council reaches a common position on the ETS reform proposal, trilogue negotiations between the Council and the European Parliament will start on 30 March 2015. The Commission will publish the EU ETS review to implement EU’s 2030 target only after successful conclusion of these negotiations (probably still before summer). It remains crucial that the upcoming ETS review provides a permanent solution to cancel the overgenerous amount of pollution permits, in particular the 800 million surplus allowances that would flood the carbon market and undermine the EU’s 2030 target by around 3%.

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