EU Lawmakers Back Moves to Tighten Emissions Trading System

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By Stephen Gardner

The European Union’s Emissions Trading System would be tightened after 2020 to reduce a huge surplus of carbon permits that have suppressed EU carbon prices, under a reform European Parliament lawmakers provisionally approved Feb. 15.

Sitting at a plenary session in Strasbourg, France, lawmakers also voted to tighten the emissions cap on aviation in the ETS, and to bring shipping into the system unless the International Maritime Organization takes steps to limit shipping emissions.

But lawmakers overturned the European Parliament environment committee’s position that the annual number of carbon permits issued to ETS participants should be cut more rapidly after 2020. The environment committee voted on the issue last December.

Milan Elkerbout, a climate and energy researcher with Brussels think tank the Centre for European Policy Studies, told Bloomberg BNA Feb. 15 that the Parliament’s plenary position added up to a modest reform that nevertheless “still represents a significant improvement” compared to the original proposal to update the ETS after 2020, which the European Commission published in July 2015.

The Parliament’s position left open the possibility of further tightening to reduce emissions more rapidly after international talks start in 2018 to assess whether the 2015 United Nations Paris Agreement on climate change is on track, Elkerbout said.

Lawmakers backed the ETS reform by a vote of 379–263, with 57 abstentions. Their position remains provisional because the final form of the ETS reform must be adopted by the Parliament in negotiations with the Council of the EU, which represents the governments of member countries.

Removal of Allowances

The European Union ETS is the bloc’s main instrument to reduce emissions from energy generation and heavy industry. It covers about 11,000 facilities and 45 percent of EU emissions. European Union leaders have agreed that those emissions should be cut by 43 percent by 2030 compared to 2005, contributing to an overall EU cut of 40 percent by 2030 compared to 1990.

By putting a price on greenhouse gas emissions, the ETS is intended to provide an incentive to emissions-reducing investment, but the system has built up a surplus of more than 2 billion carbon permits, leading to a low carbon price and limited incentive to invest.

According to the European Parliament position, the surplus would be reduced by moving 24 percent of excess allowances every year for four years, starting in 2019, into a reserve, and by canceling 800 million allowances in 2021. Currently, the proportion of allowances to be shifted into the reserve is set at 12 percent of the surplus each year.

Elkerbout said the cancellation of 800 million allowances would remove “less than half of the surplus but still in an absolute sense it is a large number,” and it “remains to be seen” what will happen to the allowances that end up in the reserve.

Lawmakers stuck to the European Commission’s proposal that the overall allowance cap should be reduced by 2.2 percent a year after 2020 compared to 1.74 percent. The Parliament’s environment committee voted for a 2.4 percent annual reduction.

Ships and Planes

The annual amount of carbon permits distributed to airline operators should be reduced by 10 percent after 2020, lawmakers said. Currently, airlines receive allowances equivalent to 95 percent of their average emissions between 2004 and 2006. The ETS covers flights only within the EU.

Lawmakers voted that shipowners should be required to obtain carbon permits to cover the emissions of voyages to and from EU ports. The requirement would start in 2023, unless the International Maritime Organization agrees to implement an international emissions scheme for shipping.

Wendel Trio, director of the Climate Action Network Europe, told Bloomberg BNA Feb. 15 that the measures on shipping and aviation were welcome because there were “no real solutions at the global level” to emissions from these sectors.

Trio added that despite some tightening, the European Parliament’s position on the reform “is not going to make the ETS function again.”

To reach a long-term decarbonization goal to reduce emissions by up to 95 percent by 2050, the EU carbon price “probably needs to go beyond 100 euros” ($106) per metric ton of carbon dioxide, Trio said.

The current price is about 5 euros ($5.29), at which level the ETS “doesn’t change investment decisions,” Trio said.

Negotiations Ahead

Environment ministers from member countries will discuss ETS reform at a Feb. 28 meeting, an official with the Council of the EU told Bloomberg BNA Feb. 15. So far, the council has not adopted a position on the reform.

Elkerbout said the moderate reforms that the European Parliament supports make it “very feasible” that Parliament and the council could strike a deal on the final form of the ETS after 2020.

The reform also would deal with issues such as the proportion of carbon permits that ETS participants receive for free, and adjustments to allocations that have to be made to ensure that the overall number distributed does not exceed the emissions cap in each year.

Miguel Arias Cañete, the EU climate and energy commissioner who proposed the ETS reform in 2015, said the council should seek to “swiftly reach an agreement” so that talks with the European Parliament to finalize the reform could begin.

Ian Duncan, a British center-right lawmaker who is responsible for preparing the European Parliament’s position on emissions trading system reform, said EU countries committed in the Paris Agreement to tackle climate change and ETS reform would be central to delivering on them.

Keeping to the Paris Agreement commitment to limit global warming was “bigger than Brexit, bigger than Britain, bigger than the EU. We have to get it right,” Duncan said.

To contact the reporter on this story: Stephen Gardner in Brussels at correspondents@bna.com

To contact the editor responsible for this story: Greg Henderson at ghenderson@bna.com

For More Information

The European Parliament procedure file on the EU ETS after 2020 is available at http://src.bna.com/meS.

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