Two-step approach to stabilise carbon market
The European Commission has presented a twin-track strategy to reform the Union’s emissions trading system (ETS). This addresses the growing surplus of allowances due to the economic crisis by proposing some short-term measures and triggering debate on longer-term structural changes.
The ETS entered its third phase in 2013 and now covers around half of all greenhouse gas emissions in the EU. However, due to the slowdown in economic activity, it has inherited a large surplus from the previous phase and their number is expected to increase over the next two years.
As a short-term measure to correct the imbalance between supply and demand in the carbon market, the Commission has proposed postponing the auctioning of 900 million allowances from 2013-2015 to 2019-2020, when demand is expected to pick up.
However, further action is required since there is likely to be a considerable structural surplus of allowances throughout the third phase. This would affect the orderly operation of the carbon market and could weaken the ETS’s ability to meet more demanding emission targets after 2020.
More ambitious reform
This funds innovative low-carbon energy demonstration projects for safe carbon capture and storage (CCS) and innovative renewable energy sources (RES). A first funding award of over EUR 1.2 billion for 23 RES projects was made in December 2012. A second call for proposals was made in April 2013. The programme takes its name from the sale of 300 million emission allowances from the New Entrants Reserve (NER).
To tackle this structural problem, the Commission is canvassing outside opinions on six possible options it tabled in its first report on the state of the European carbon market in November 2012, any of which could tackle the surplus.
The first would increase the EU’s greenhouse gas emissions reduction target for 2020 from 20% to 30% – a pledge the Union has already made provided its international partners do more to fight climate change.
Two other options could see the permanent withdrawal of a number of emission allowances or a greater increase in the annual reduction of allowances made available. Thought is also being given to including more industrial sectors in the system or to limiting access to international credits, which are currently allowed as substitutes for the ETS allowances.
A sixth, more complex possibility could be to try to influence the market by setting a carbon price floor or using a special reserve to regulate the number of allowances available.
Input from stakeholders and from two consultation meetings held earlier this year will help shape the structural reform agenda. The exercise is taking place at the same time as thought is being given to the future 2030 strategy (see following article) which could be the vehicle for implementing any longer-term options chosen.