EU Reaches Deal to Overhaul World’s Largest Emissions Market

Written by Ewa Krukowska. This article first appeared in Bloomberg Markets. 

European Union negotiators agreed to overhaul the region’s cap-and-trade program, approving a plan to bolster carbon prices and adjust the emissions market to more ambitious climate goals in the next decade.

EU permits gained as much as 3.4 percent to 7.98 euros a metric ton on Thursday. The provisional deal reached early Thursday between representatives of EU nations and the European Parliament follows more than two years of uncertainty over the fate of the Emissions Trading System after 2020. The challenge was to find an economically and environmentally sound compromise among 28 member states with differing energy sources.

The agreement was reached in time for the United Nations annual climate meeting, where the EU aims to push for more aggressive ways to combat pollution. Envoys from more than 190 countries gathered in Bonn on Nov. 6 for two-week talks on the implementation of the Paris Agreement to cut greenhouse gases blamed for global warming.

“Throughout the negotiations we kept one goal in mind: steadily reducing carbon dioxide while safeguarding jobs and European competitiveness,” Ivo Belet, lead lawmaker on the reform for the European People’s Party, said by phone. “The ETS is an essential part of the EU climate policy. Without this ambitious reform it would be impossible to achieve the Paris goals.”

At stake in the EU negotiations, which ended after 3 a.m. Brussels time, was aid under an energy modernization fund for poorer member states, with some lawmakers pushing to restrict financing just to utilities that emit less than 450 grams of carbon dioxide per kilowatt hour, a move that would make aid unavailable to coal-fired power plants. Negotiators agreed that the fund won’t support coal-based utilities except for projects in the poorest member states that invest in district heating, according to two people with knowledge of the talks.

More Needed

“ETS is improved; but won’t be the flagship for EU climate policies,” Bas Eickhout, lead lawmaker from the Greens group in the EU Parliament, said on Twitter. “Additional national and European policies remain essential.”

The reform will strengthen a tool to alleviate a market glut that slashed the price of emission permits by almost 70 percent over the past nine years. The number of allowances swept into the so-called Market Stability Reserve will double over a five-year period starting in 2019. From 2023, permits in the reserve will start expiring if they exceed the amount sold at auctions in the previous year. Nations will also have the option of canceling permits linked to power plant closures.

The deal is subject to approval by ambassadors representing EU national governments. If it gets the green light, it will need support from the EU Parliament and ministers from member states to take effect.

“ETS needs reform to remain effective and deliver our climate goals,” said Annikky Lamp, spokeswoman for Estonia, which holds the rotating presidency of the EU. “The preliminary agreement ensures that. The outcome significantly strengthens the ETS, maintains the environmental integrity of the system, supports innovation and modernization in the energy sector and tackles the risk of carbon leakage.”

Tougher Targets

Allowances for delivery in December were up 2.3 percent to 7.90 euros a metric ton on ICE Futures Europe as of 7:15 a.m. London time. That compares with the target of 25 euros to 30 euro that lawmakers had in mind when they were designing rules for this phase of the market.

Europe, which wants to lead the global battle against climate change, toughened its carbon-reduction target to at least 40 percent by 2030 from 1990 levels compared to 20 percent in 2020. The EU ETS covers almost half the region’s emissions, imposing pollution limits on around 12,000 facilities owned by manufacturers and utilities.

The deal also envisions:

  • Increasing the amount of permits available to industry for free by 150 million. Unless they’re needed to avoid triggering a mechanism that automatically slashes allocations, the allowances will be transferred to innovation and modernization funds
  • Adjusting the value of benchmarks that determine the number of free permits by between 0.2 percent and 1.6 percent in each year between 2008 and the middle of the period for which free allocation is to be made
  • Earmarking for Greece the revenue from sales of 25 million unused allowances from the 2013-2020 period known as Phase 3
  • Merging of the Just Transition Fund into the modernization fund. Financing won’t be available for energy producers using solid fossil fuels except for projects involving district heating in nations with GDP per capita below 30 percent of the EU average in 2013
  • Introducing stricter emission criteria for projects totaling more than 12.5 million euros taken on by utilities receiving free permits. Such projects can’t improve the financial viability of highly carbon-intensive power production

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