Where next for the EU ETS?

On Tuesday, the European Parliament’s Environment Committee overwhelmingly adopted a report to introduce a Market Stability Reserve (MSR) to the EU ETS, with some changes to the Commission’s original proposal. This post looks at what happened, and what we might expect going forward. What is the MSR all about? For anyone unfamiliar with the MSR, the Commission’s legislative proposal here is rather self-explanatory. Its purpose is to add flexibility in the EU ETS, whereby surplus allowances would be moved to a reserve and return to market at times when insufficient allowances are available. It would guarantee a more balanced market, with a carbon price more strongly driven by mid- and long-term emission reductions and with stable expectations encouraging low-carbon investments. A helpful summary of the proposal is included in the European Commission’s Questions and Answers (here). What was adopted in the ENVI Committee? Thanks to compromise amendments among the main political groups in the ENVI Committee, the text that was adopted had largely been negotiated ahead of the vote. The key points of the agreement are as follows:

  • The MSR will be established in 2018 and shall operate by 31 December 2018
  • Changes in auction volumes will take place without undue delay after the publication of the total number of allowances in circulation in May each year
  • The 900 million allowances withheld by backloading and any unallocated allowances will be moved directly to the reserve
  • 300 million allowances from the pool of unallocated allowances will be made available to develop breakthrough technologies, between the start date of the operation of the MSR and until 31 December 2025
  • The Commission is requested to look at the carbon leakage rules in the EU ETS six months after the adoption of the Decision on the MSR and, if appropriate, will present a legislative proposal
  • The MSR will be reviewed three years after it starts

The MEPs also gave the Rapporteur for this file the mandate to start negotiating with EU Member States (Council) and the European Commission, based on the text that the ENVI Committee had just adopted. This was an important outcome – and was only possible by the fact that the final report was supported by such a strong majority. This means Members of the European Parliament’s ENVI Committee chose to by-pass a vote in the entire Parliament with 751 MEPs voting on a topic they may not know much about and which could easily become politically-driven for reasons outside of the actual legislative proposal. However, this is not the final step for the adoption of the MSR… This vote was important as it gives the Parliament’s negotiating team a strong mandate ahead of the negotiations with the other institutions. It’s still unclear when these negotiations (called trilogue negotiations) might begin … as one other key actor in these negotiations still hasn’t got a position! The Council – which is the European institution representing all EU Member States – is yet to finalise a common position and, at the moment, it’s too early to predict what text they might agree on as there is a blocking group of Member States opposed to the MSR starting before 2021, and another key bloc advocating for a 2017 start date. EU Member States will continue discussing this file at technical meetings, called Working Party Meetings on the Environment. Once the discussions move to a more political level, then EU ambassadors will take over (in what are called COREPER meetings) and eventually will be asked to vote on the proposed common Council position that the Council Presidency still needs to put forward. The Council Presidency is currently held by Latvia, and from July onwards, they will be replaced by Luxembourg. I won’t elaborate on the rather technical rules for counting votes in Council, and the fact that the rules of procedure were recently amended, but that they still allow the ‘old vote count’ to continue applying until 2017 if any one Member State makes such a request. When the Council Presidency is confident they’ll achieve the necessary majority in COREPER, they’ll put it for a vote.   Once approved, this will represent the EU Member States’ position on the MSR proposal. And this means these trilogue negotiations with the European Parliament, EU Member States and the European Commission can begin… What happens after the trilogues? The deal that is approved amongst a small team of negotiators from all three EU institutions needs to be endorsed by these institutions as a whole.   An optimistic scenario could see the final deal approved before the Summer break, but it may be delayed depending on how long it takes for EU Member States to agree on their draft position and depending on how many trilogue meetings are needed for a deal to be negotiated.   What does this mean for carbon pricing? The MSR was designed to introduce flexibility in the supply of EUAs and redress a basic design problem that didn’t allow it to adapt to unforeseen shocks to the system. As it is being introduced at a time of structural surplus in the system, the expectation is that it will also serve to remove some of this surplus by putting it into the reserve. But it also means that some of these surplus allowances will become available at a later date when there are insufficient allowances in circulation to allow for normal market functioning. An agreement on the introduction of the MSR will be a strong political endorsement that the EU ETS is the EU’s flagship climate policy – and will continue to be so for years to come. It would also demonstrate political acknowledgment that a well-functioning emissions trading system can ensure a least-cost decarbonisation path. The cross-political support shown in the EU is a strong signal to other jurisdictions that markets will play an increasing role in future climate policies. Sarah Deblock, EU Policy Director, IETA

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