Something remarkable happened on Tuesday, when a group of European parliamentarians voted to approve reform of Europe’s carbon market.
The Environment Committee of the European Parliament reversed a previous existential threat to the market, assuring its future; and in so doing, they made the Commission’s proposals more ambitious.
The European Commission is well known for pushing social and environmental goals, which the European Parliament and EU member states subsequently tone down. On Tuesday, however, took the Parliament committee took the Commission’s proposals to make the carbon market more environmentally effective, and made them tougher.
This new enthusiasm probably reflected the realisation that the EU emissions trading scheme (ETS) has been wrecked now for too long.
The trading scheme imposes a carbon emissions limit on around 12,000 factories and power plants. Collectively, they face an annual emissions cap of about 2 billion tonnes of carbon dioxide (CO2), assigned through a quota of 2 billion tradable emissions permits, called EU allowances (EUAs).
During the financial crisis, many of the EUAs were un-used, building up an annual surplus that now exceeds 1.5 billion tonnes. This surplus will barely shrink over time, even as the EU’s new emissions targets kick in through 2030. Without additional steps, the EUA surplus will be bigger in 2030 than it is today (see chart below).
The EU has already agreed to temporarily remove some 900 million surplus EUAs from 2014-2016. But it would then return them to the market in 2018-2019, in a process called back-loading (see chart). Two years ago, the European Parliament had even rejected back-loading, a decision which threatened near-zero, irrelevant carbon prices for decades.
To eliminate the surplus, the European Commission has proposed a market stability reserve (MSR), a kind of central bank, which would remove or add EUAs to the market, according to whether they were in surplus or deficit. The Commission had proposed to launch the MSR in 2021.
Note that the chart below records what will happen without additional action, such as an MSR.
On Feb. 24, the Parliament Committee took the Commission’s MSR proposals and made them tougher, and more urgent.
First, it has brought the MSR launch forward to the end of 2018. Second, and most significantly, it has proposed to remove 900 million EUAs from 2019-2020, and put these into the MSR directly, bringing the carbon market back into balance much quicker. And third, it proposed to put into the MSR any additional, unallocated EUAs as a result of factory closures by 2020.
Together, these measures mean that the EU ETS is back on track, and we can expect meaningful carbon prices of more than 15 euros in the 2020s, compared with about 7 euros now, enough to drive long-term investment away from coal to gas and renewables.
The Environment Committee amendments should now become law, probably before the summer break, once representatives of Parliament and member states have made any further changes, which are likely to be small.