Negotiators from the European Council, the European Parliament and the EU Commission have agreed that a market stability reserve (MSR), starting on 1 January 2019 will be at the core of reform of the European Emissions Trading System (EU ETS).
“European emissions trading has a future again,” said Germany’s Environment Minister Barbara Hendricks on Wednesday. The ETS reform will give Europe the necessary momentum to reach its greenhouse gas reduction targets in a cost-efficient way, she added.
Germany had previously called for the MSR to come into force in 2017. The European Parliament wanted it to begin in 2018 while the European Commission wanted to hold off until 2021. Hendricks said the result accommodated Germany’s core demands.
Following the agreement of the three EU institutions, the next step is for the European Parliament and the member states to officially agree to the reform.
Hendricks also said that until the MSR begins to have an effect on the number of emission allowances in circulation, Germany would have to rely on additional national climate protection measures, particularly in the energy sector.
The EU Emissions Trading System (EU ETS) sets an overall limit on all CO2 emissions from power stations, energy-intensive industries (e.g. oil refineries, steelworks, and producers of iron, aluminium, cement, paper, and glass) and civil aviation. Entities that fall under the ETS scheme are allocated or must purchase an allowance for every tonne of CO2 they emit.
The market stability reserve is designed to reduce the large excess of emission allowances in the EU ETS which causes persistently low prices for CO2 emissions of around 5-7 euros per tonne CO2. At the moment there are over 2 billion superfluous allowances in the market. As of January 2019, a certain percentage of allowances should now be transferred into the MSR, depending on how many allowances are in circulation.
Unallocated permits, as well as over 900 million “backloaded” allowances that were temporarily removed from auction in 2014 – 2016, will also be added to the reserve.
The German Association of Energy and Water Industries (BDEW) called the MSR an “important instrument and requirement of ETS reform,” but said it was “regrettable” that it would not come into effect before 2019.
BDEW Chairwoman Hildegard Müller said: “It’s a good decision to transfer the backloaded allowances completely into the reserve. This is important to increase planning security for companies to support investment into low CO2 and highly efficient technologies.”
German Chemicals Industry Association VCI criticised the result of the talks, saying that the MSR would “artificially drive up the price for CO2 allowances” and was therefore not compatible with the market-based system of the ETS.
VCI chief executive Utz Tillmann said in a statement on Wednesday: “Energy intensive companies will be confronted with a massive additional burden. The chemicals industry alone could face additional costs of 2.2 billion euros annually, if the projections of the Commission are correct.” The chemicals sector in Europe would lose its competitiveness compared to producers in other parts of the world and should be compensated to prevent this development, he said.