Reform of emissions trading system agreed
New law will accelerate the withdrawal of emission allowances
9 February, 2018
A law to strengthen EU curbs on CO2 emissions from industry, with a view to delivering on pledges made under the Paris climate accord, was approved last Tuesday by MEPs. The new law, already informally agreed with EU ministers, will accelerate the withdrawal of emission allowances available on the EU Emissions Trading System (ETS) carbon market, which covers around 40% of EU greenhouse gas emissions.
“The ETS remains the cornerstone of our EU policy to combat climate change,” Parliament's rapporteur Julie Girling 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,” she added.
The new law provides for an increase in the yearly reduction of emission allowances to be placed on the market by 2.2% from 2021, up from the 1.74% planned at present. This factor will also be kept under review with a view to increasing it further by 2024 at the earliest. It will also guarantee a doubling of the ETS Market Stability Reserve's capacity to mop up excess emission allowances on the market. When triggered, it would absorb up to 24% of excess allowances in each auctioning year, for the first four years, thus increasing their price and adding to the incentive to reduce emissions.
Two funds are intended to help foster innovation and spur the transition to a low-carbon economy. A modernisation fund will help to upgrade energy systems in lower-income Member States. MEPs tightened up the financing rules so that the fund is not used for coal-fired projects, except for district heating in the poorest Member States.
And an innovation fund will be deployed to give an incentive to companies to develop new energy technologies, which should help the EU reach its long-term climate goals. The size of the fund will not be known until after the new ETS period kicks in, in 2021. The fund will be filled with the revenue of sales of at least 400m ETS credits, which certain companies need to buy to be permitted to pollute.
However, it is impossible to predict the price of these credits beforehand. The past six months, the price of a tonne of CO2 has increased from around €5 to €9. At current prices, 400m of ETS credits translates into roughly €3.6bn. It is a successor to a previous fund, called NER300, which has some €436m left over. That money will soon be transferred to the Innovation Fund. Several factors, including the financial crisis, made it difficult for NER300 projects to find the required co-financing from other non-EU means.
The law also aims to prevent 'carbon leakage', i.e. the risk that companies might relocate their production outside Europe due to emission reduction policies. The sectors at the highest risk will receive their ETS allowances for free. Less exposed sectors will receive 30% for free.