CO2 emissions trading overhaul will drive EU towards low-carbon economy

Now that parliament has approved plans for a reformed emissions trading scheme, all eyes are on commissioner Cañete to come up with a carbon market proposal, writes Ivo Belet.

By Ivo Belet

16 Jun 2015

Back in early May, the European parliament and member state representatives reached an agreement on a far-reaching reform of the European emissions trading scheme (ETS). That agreement has also been endorsed by parliament's environment, public health and food safety committee and is tabled for plenary adoption next month.

This reform is structural and effective. ETS is the centrepiece of the EU's 2030 climate and energy policy framework. An effective carbon pricing system incentivises energy efficiency and low-carbon production. Because of the economic crisis, there needed to be an overhaul of the ETS.

The slow-down in industrial activities has led to a massive surplus of CO2 allowances, resulting in very low CO2 prices – between €7 and €8 per tonne of CO2 emissions, whereas the original aim was to price emissions at €30 per tonne.


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This prompted a much needed reform, through the introduction of a market stability reserve (MSR). The MSR is a market-based correction mechanism that ensures more stable CO2 prices by automatically reducing the offer when there are too many CO2 allowances on the market.

Conversely, in case of a shortage, more allowances are put on the market. The MSR will be set up in 2018 and will start operating as of 1 January 2019. The ETS reform is far-reaching and will ensure that CO2 prices effectively spur investment in cleaner energy.

At the same time, it balances ambitious climate policies with legitimate industry concerns. The reform offers certainty for industry and for investors and guarantees a gradual and balanced route towards low-carbon production.

This shift requires a considerable amount of investment, therefore parliament insists on the creation of an innovation fund to assist industry in converting to low-carbon technologies. Companies whose production complies with the highest CO2 standards will continue to receive free CO2 allowances so they are not at a disadvantage compared to their competitors in other parts of the world.

Parliament has also obtained strong guarantees to prevent carbon leakage. For energy-intensive industries such as steel, chemicals and glass, reducing CO2 emissions is a daunting task.

The agreement provides sufficient guarantees to these companies to prevent them from having to move their production facilities to countries outside the EU that have less stringent climate policies – 'carbon leakage'.

The reformed ETS will put Europe back on track to reach its 2030 climate target of reducing greenhouse gases by 40 per cent compared to 1990 levels. At the same time, it puts the EU in a leading position for the upcoming UN COP21 climate conference in Paris where an international climate agreement is to be negotiated.

This trilogue agreement paves the way for the next phase of the ETS reform. The parliament counts on European climate action and energy commissioner Miguel Arias Cañete to swiftly come up with a legislative proposal on the European carbon market after 2020.

The commission has carried out an extensive public consultation with stakeholders on post-2020 carbon leakage provisions, so that the new scheme does not place excessive burden on Europe's industry. We are looking forward to an ambitious, innovative and well-balanced proposal.

 

Read the most recent articles written by Ivo Belet - Emissions reduction: EU has no time to waste on climate action

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