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EU CO2 market reform must work around existing cap: lawmaker

15 June 2016 | Markets

Reform of the EU Emissions Trading System is not likely to include a steeper annual decline in Europe's CO2 cap and must focus on voluntary cancellation of surplus permits, the European Parliament's lead lawmaker on the EU ETS, Ian Duncan, said on Friday.

"The EU Emissions Trading System doesn't work, at least not as it was intended to work," Duncan said in a speech at a forum in Paris. "A symptom of this is a carbon price of around Eur6.00 per ton; an irritant but not a serious driver of innovation or of change," he said at the Carbon Pricing Leadership Coalition High Level Forum on a proposal for a carbon collar.

"There are simply too many allowances. When the ETS was launched back in 2005, with an initial carbon price that rose to Eur35, I might add -- no one foresaw the single largest global economic contraction in over 80 years." "None of the original ETS architects had anticipated such global contraction, so no provision was made to address the problem," he said.

The resulting surplus of allowances has persisted since that time, with only moderate tinkering by EU lawmakers to take account of the surplus while fearing imposing higher than necessary costs on Europe's industry.

Overlapping EU climate and energy policies also contributed to a successful reduction of Europe's CO2 emissions, but also contributed to the oversupply under the EU ETS, Duncan said.

Analysts widely agree that the weak CO2 price under the EU ETS is an accurate reflection of the political ambition built into the system's settings, rather than a failure of the market mechanism itself, and that a tougher cap would deliver a stronger price if Europe wanted it.

That's not politically feasible at this stage, Duncan said. "One point become clear early on: whilst there is agreement on the need to raise ambition, there is little appetite (and certainly not the votes), to raise the ambition of the Linear Reduction Factor (not yet anyway)," Duncan said in a transcript of his speech.

The LRF is the annual reduction to the hard cap on European industry's CO2 emissions -- currently set at 1.74% per year, and expected to be raised to 2.2% from 2021 to 2030.

Duncan, who is the European Parliament's environment committee's rapporteur for EU ETS reforms, is a Scottish Conservative and belongs to the European Conservatives and Reformists Group in the EU Parliament. His group is relatively small and he has therefore had to work closely across the politicial groups to ensure consensus on enough points to give the proposals a chance of passing into statute.

LAWMAKER PROPOSES THREE KEY CHANGES

Duncan's legislative proposal to reform the EU ETS, released May 31, is largely focused on three changes.

The first is an option to allow EU member states to voluntarily cancel surplus allowances that result from the success of national emissions policies, allowing some countries to "move ahead of the pack."

The second is a proposal that the European Commission must determine the impact of overlapping policies on the carbon price each year and adjust the EU ETS accordingly, either through retiring allowances or structural reform.

The third proposal involves a re-calibration of the EU ETS in light of a global stock-take in 2023 under the UN's Paris Agreement, when countries are expected to assess progress toward global long-term decarbonization targets.

"The EU has many policies it could adjust, but this clause will mean that adjustment of the ETS is embedded in law," Duncan said.

"Each of these locks addresses the issue of volume of allowances. It empowers both the EU and the 'high ambition coalition' Member States to reduce the allowances in the market, without recourse to a further backloading mechanism [withholding auction volume] or through the imposition of a steep linear reduction factor (which doesn't seem to have the votes)," Duncan said in the transcript.

Proposed legislative changes to the EU ETS need the backing of the EU Parliament and Council before becoming law.

The Parliament's environment and industry committees are considering proposed changes, with plenary decisions expected in early 2017 and a final co-decision agreement likely in mid-to-late 2017.

Duncan was also critical of a French proposal to impose a carbon floor price and an annual mechanism to push EU carbon prices higher.

"The declaration that the imposition of a carbon floor and an annual ratchet 'will lead to a price of Eur 30.00/mt by 2030' is disingenuous. The market isn't being led, the price is being set. This is about as far from a market-driven price as it is possible to be," he said. The French 'soft collar' price proposal would be "solving the wrong variable," Duncan said. 

"The price is a symptom of the failure of the ETS, not a cause. The cause, as I outlined above, is oversupply," he said.

 

Source: Platts