EU Parliament vote to hurry system that will combat carbon market instability

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25 February 2015

LONDON: The environmental committee of the European Parliament has voted to introduce the Market Stability Reserve into the EU Emission Trading Scheme four years early.

The Emission Trading Scheme (ETS) is the largest greenhouse gas emissions trading scheme in the world. It was launched in 2005 to push industries to limit their emissions and regulate the carbon allowances market.

The scheme is based on a ‘cap and trade system’, which sets a price for carbon emissions that heavy industries and energy companies buy as “allowances” in order to keep releasing CO2. If companies keep polluting without buying these allowances, they are subject to heavy fines.

Putting a price on carbon has been proven as a simple, fair and effective measure,” says Mark Kenber, CEOThe Climate Group. “Science demonstrates we need to reach zero emissions by mid-century, if we want to avoid catastrophic effects on both our environment and economy. We have the technology to achieve this inevitable goal, but we need more support from national governments.

“The ETS allows forward-thinking companies to implement their low carbon strategy, while at the same time compelling polluters to pay for the direct and indirect costs of their emissions. It’s a win-win, and we urge governments to implement more, bold schemes like this to allow businesses of the future to prosper and create new jobs.”

A price for pollution

ETS systems help turn carbon into an expensive source of energy and promote renewables and low carbon technologies as the cheapest solution.

But since the economic crisis in 2008, prices of EU-ETS allowances dropped from 30 euros per CO2 ton to 7 euros per ton, so the European Commission decided to regulate the system by creating a Market Stability Reserve (MSR). This would prevent further severe price drops and avoid flooding the market with low-cost carbon credits.

The EU is currently retaining 900 million carbon credits, which are estimated to account for two billion tonnes of carbon emissions, to let their price rise again and avoid crushing the system. But this is called ‘back-loading’ and is only a temporary solution.

With yesterday’s vote, MEPs propose to introduce the MSR in 2018, rather than in 2021, in a bid to reduce the surplus of carbon credits faster. Once voted and approved by the European Council, the MSR will become a long-term solution.

Currently the EU still has the power to back-load the surplus of carbon credits, but there are no rules defining when and if these will be auctioned. Importantly, companies will not be able to purchase more allowances at the current lower price instead of curbing their carbon footprint.

Carbon market regulation

With the vote to bring forward the creation of a European reserve, the ETS will be better protected from future market shocks. The reserve will also become the official system to control the supply of allowances to be auctioned on the market.

“This vote sends a strong signal that Parliament is serious about fighting climate change while at the same time bearing in mind the concerns of industry. The reform approved today shows that we can reunite an ambitious climate policy with growth and jobs. The Market Stability Reserve will ensure that CO2 prices spur investments in greater energy efficiency” said Ivo Belet, who is leading the reform process through member states and the Parliament.

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By Denise Puca

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