Deal reached to overhaul EU ETS

A deal has been reached to reform the European Union’s mechanism for tackling emissions from large generators – the Emissions Trading Scheme (ETS) – after the year 2020. The provisional agreement between the European Parliament and the European Council was reached in the first week of the UN COP 23 climate conference. Reform of the ETS has been under discussion for two years, with the new measures aiming to bolster carbon prices in a scheme that has suffered from over-allocation of permits (which each represent one tonne of carbon dioxide) and low carbon prices since its inception.

The European Commission says that the sectors covered by the EU ETS need to reduce their emissions by 43% on 2005 levels by 2030. At the time of writing the deal is expected to be approved towards the end of November. It will see allowances that are planned for a socalled ‘Market Stability Reserve (MSR)’ double over a five-year period, from 2019 to 2023. The MSR will act to bolster the carbon price by taking excess allowances out of the market.

After 2023 the agreement will see these permits start to expire. And the agreement would see the overall cap on the total volume of emissions increase from 1.75% per year to 2.2%. To appease businesses, the reforms will also see the amount of free permits available to industry to increase by 150mn, which will be transferred to innovation and modernisation funds.

The campaign group Sandbag said that the agreement fails to adequately target the issue of free allocation of permits, and that if EU emissions continue to fall at the current rate, there will still be a surplus of around 2bn tonnes of allowances in the market in 2030 – which will not deliver an adequate carbon price. ‘[The] agreement maintains the EU carbon market as a climate change policy in name only,’ said Rachel Solomon Williams, Managing Director at Sandbag. ‘Progress in some areas, although welcome, has failed to deliver a coherent system, and billions of surplus allowances will continue to prevent the meaningful carbon price the EU sorely needs.’