European Council backs more ambitious ETS action

The European Council favours an overhaul of the European Emissions Trading Scheme (ETS) that could see excess emission allowances, which have dogged the scheme and suppressed Europe’s carbon price, taken out of it entirely in 2024.

The Council’s position, agreed on 28 February, would see the cap on emission allowances lowered by 2.2% per year as well as the scheme’s Market Stability Reserve (MSR) – which has been designed to temporarily hold excess allowances from the market – being enhanced.

The agreement from the Council – which is made up of representatives from European member states – surprised commentators for being more ambitious than the European Parliament’s position made clear earlier in February. The European carbon market did not respond at all to the Parliament’s vote, with carbon prices remaining static after the news, hovering at around €5 per tonne.

The ETS works by capping the total emissions from large carbon emitters in the European Union and allowing companies to trade emission allowances (equal to one tonne of carbon dioxide) to cost-effectively reduce emissions. Certain areas of industry are allocated free allowances to emit, and the accumulation of these and other allowances following Europe’s economic slowdown has created an excess in the system, and a price too low to stimulate real action on emissions.

The idea of an MSR was adopted in 2015. It will be introduced in 2018 and will act to store excess allowances from the market and also ‘backloaded’ allowances that have already been taken out of previous auctions.  

The Council’s new position is that the MSR should double its intake rate for five years and, after 2024, allowances above a certain threshold in the MSR should be permanently cancelled. According to campaign group Sandbag this could mean a cancellation of 3bn tonnes of allowances over ‘phase 4’ of the ETS – from 2021 to 2030. These allowances would be equivalent to two years’ worth of the ETS’ total emissions. 

A provision is also included in the Council’s position that member states cannot provide more than 25% of revenues from allowance auctions towards indirect compensation of carbon costs for their industrial sectors. The Council also says that the amount of allowances given out to industry should be reduced by 2%, meaning 52% of allowances in the future would be auctioned and 48% given out for free. An innovation fund will also be set up to help industry to develop technology to lower its emissions.

Despite the increased ambition from the European Council, Sandbag and others point out that these measures would not start to reduce the allowance surplus in the market until mid-next decade. 

The European Parliament had supported the doubling of the MSR intake rate and the cancellation of 800mn allowances from the MSR in 2021. But it does not support the EU Environment Committee’s previous recommendation that Europe’s cement sector be taken out of the ‘carbon leakage’ list – ie those sectors that could move outside Europe to avoid paying carbon costs – and not given free allowances.

Now that the Council’s and the Parliament’s positions are clear, the future of the ETS will be discussed in European Union ‘Trialogue’ negotiations – between the European Parliament, Council and Commission. To achieve the EU’s target of reducing greenhouse gas emissions by 40% by 2030 the sectors covered by the EU ETS will have to reduce their emissions by 43% compared to 2005, according to the Commission.