Climate Action
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Structural reform of the EU ETS

Policy

A surplus of emission allowances has built up in the EU emissions trading system (ETS) since 2009. The European Commission is addressing this through short- and long-term measures.

The surplus of allowances is largely due to the economic crisis (which reduced emissions more than anticipated) and high imports of international credits. This has led to lower carbon prices and thus a weaker incentive to reduce emissions.

In the short term, the surplus risks undermining the orderly functioning of the carbon market. In the longer term it could affect the ability of the ETS to meet more demanding emission reduction targets cost-effectively.

The surplus amounted to around 2 billion allowances at the start of phase 3 and increased further to more than 2.1 billion in 2013. In 2015, it was reduced to around 1.78 billion as a consequence of back-loading. Without this, the surplus would have been almost 40% higher at the end of 2015.

‘Back-loading’ of auctions in phase 3

As a short-term measure the Commission postponed the auctioning of 900 million allowances until 2019-2020.

This ‘back-loading’ of auction volumes does not reduce the overall number of allowances to be auctioned during phase 3, only the distribution of auctions over the period.

The auction volume is reduced by

  • 400 million allowances in 2014
  • 300 million in 2015
  • 200 million in 2016.

The impact assessment shows that back-loading can rebalance supply and demand in the short term and reduce price volatility without any significant impacts on competitiveness.

Back-loading was implemented through an amendment to the EU ETS Auctioning Regulation, which entered into force on 27 February 2014.

Market stability reserve

As a long-term solution, changes will be introduced to reform the ETS by establishing a market stability reserve as of 2018. The reserve will start operating in January 2019.

The reserve will:

  • address the current surplus of allowances
  • improve the system's resilience to major shocks by adjusting the supply of allowances to be auctioned.

The 900 million allowances that were back-loaded in 2014-2016 will be transferred to the reserve rather than auctioned in 2019-2020.

Unallocated allowances will also be transferred to the reserve. The exact amount will only be known in 2020. However, market analysts estimate that around 550 to 700 million allowances could remain unallocated by 2020 (see impact assessment accompanying the legislative proposal for the revision of the EU ETS).

The reserve will operate entirely according to pre-defined rules that leave no discretion to the Commission or Member States in its implementation.

Efforts to address the market imbalance would also be helped by a faster reduction of the annual emissions cap. This is part of the Commission's proposal for the revision of the EU ETS.

Stakeholder input

Input into the debate on structural measures included:

  • The first report on the state of the European carbon market, published in November 2012, in which the Commission identified six options for correcting the surplus
  • Formal stakeholder consultation from December 2012 to February 2013 – see all contributions
  • Consultation meetings in March and April 2013, each focusing on three of the options; the second meeting also looked at possible additional options supported by several stakeholders in the online consultation, including a stability reserveExpert meetings in October 2013 and June 2014 to discuss technical aspects related to the creation of a stability reserve
Documentation

Market stability reserve

Expert meetings on technical aspects of a stability reserve

'Back-loading' amendment to Auctioning Regulation

Amendment of ETS directive in relation to back-loading

Carbon market report

Review of the auction time profile