Lawmaker Proposes EU Emissions Trading Reforms

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By Stephen Gardner

May 31 — The reform of the European Union's emissions trading system after 2020 should allow a tightening of the emissions cap in response to reviews of the United Nations international climate deal, and should take a graded approach to the risk of “carbon leakage,” the lawmaker in charge of preparing the European Parliament's position said May 31.

Ian Duncan, a British center-right lawmaker, said in a report on the emissions trading system reform that the number of carbon allowances issued to its participants should reduce by a minimum of 2.2 percent per year after 2020, but that mechanisms should be introduced that could enable a more rapid reduction in the number of allowances.

The system is the EU's main climate policy mechanism, covering about 11,000 heavy industrial facilities and power plants, and some aviation. Currently the emissions cap, or the number of allowances issued to the market, reduces by 1.74 percent per year in order to contribute to a binding target for EU greenhouse gas emissions to be 20 percent below their 1990 level by 2020.

Under a proposed reform of the system published by the European Commission, the EU's executive, in July 2015, the emissions cap would tighten by 2.2 percent per year from 2021 onwards to contribute to an overall EU cut of 40 percent by 2030 relative to 1990 (38 INER 936, 7/29/15).

First Step

Duncan's report represents the first step in the European Parliament formulating its position on the emissions system reform. Once the Parliament has adopted a position, it will seek a final agreement on the reform with EU member countries represented in the Council of the EU.

The report is likely to attract a large number of proposed amendments. The first debate on the report will be in the European Parliament environment committee June 21, and the committee will vote toward the end of the year.

Duncan said that provision should be made in the emissions trading system reform for the 2.2 percent annual cut to be reviewed “following the first global stocktake in 2023” of the Paris Agreement, the global climate deal that countries approved at the end of 2015.

In addition, in monitoring the system, the commission should regularly assess the impact of “overlapping EU policies” and if necessary propose changes, Duncan's report said.

Duncan's policy manager Ross McKenzie told Bloomberg BNA May 31 that there was concern that tighter EU policies on renewables and energy efficiency were “almost undermining” the system by suppressing carbon allowance prices, and the commission should on an ongoing basis “look at the cumulative impact” of related policies to ensure the deepest possible emission cuts.

Carbon Leakage

EU member countries should also be able to opt to remove carbon allowances from the market in responses to changes in their power-generation infrastructure, such as the switching off of coal-fired power plants, according to Duncan's report.

This could lead to a “coalition of the willing” of EU countries that would more rapidly decarbonize their economies and “ramp up the ambition” to reduce greenhouse gas emissions, McKenzie said.

On the contentious issue of carbon leakage, or the risk that industrial production would be relocated out of the EU because of the cost of emissions trading, Duncan proposed that industry sectors could be classified as being at very high, high, medium or low risk, and would receive allocations of carbon allowances accordingly.

Currently, the great majority of industrial sectors are considered possibly vulnerable to carbon leakage and receive some of their allowances for free, but after 2020, under the commission's proposals, the number of vulnerable sectors would be significantly reduced.

Duncan said in a statement that “as our climate change targets increase, free allocation will become scarcer,” and therefore “we have to ensure that free allowances are allocated as efficiently as possible.”

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 draft report on the EU ETS is available at http://www.ianduncan.org.uk/files/ETSReportfinal.doc.