EU could double its renewables share by 2030 – IRENA

The European Council has given the final stamp of approval to reforms to the European Union Emissions Trading Scheme (EU ETS) for the 2021–2030 period, which are aimed to help reach the EU’s target of cutting emissions by 40% on 1990 levels by 2030. EU member states represented by the Council approved the updates that were previously agreed by the European Parliament, following provisional agreements on the scheme (see Energy World December 2017).

The reforms will see a cap on the total volume of emissions under the ETS reduced linearly by 2.2% per year. The number of allowances entering the ETS ‘Market Stability Reserve (MSR)’, which acts to regulate the price of carbon by taking excess allowances out of the market, will double until the end of 2023. And a new mechanism to limit the amount of allowances entering the MSR will become operational in 2023.

The revised ETS Directive also contains new provisions aimed to protect European industry against excess costs and ‘carbon leakage’ – where organisations might relocate outside of the EU to avoid being part of the scheme. These include revised free allocation rules, with the sectors at the most risk of relocating their production outside of the EU receiving full free allocation, and a phase out of free allocation for less-exposed sectors beginning in 2026.

Since the talks on reforms began in November 2017, EU carbon prices have risen and at the time of writing are over €11 per tonne of carbon dioxide.

As the reforms were being agreed, the Carbon team of Thomson Reuters published analysis indicating that the MSR is not being calibrated to cope with surplus emissions allowances that might arise if the EU decides to up its 2030 targets for renewables and energy efficiency. This analysis suggests that if the EU’s targets for renewables and efficiency are increased to 35% (see below), this will lower emissions, decrease demand for emissions allowances and result in a higher surplus (and therefore a lower carbon price) – a problem that has dogged the ETS since its inception.

This could potentially distort the supply-demand balance, despite the MSR being in place to ensure a balanced market, and put a bearish pressure on carbon prices, says Thomson Reuters. The analysis indicates that increasing the 2030 targets could result in a carbon price in 2030 of €11 per tonne versus €24 per tonne as things stand today.