After two years of talks, EU lawmakers secure post-2020 ETS reform deal

After two years of talks, EU lawmakers secure post-2020 ETS reform deal

Published 05:35 on November 9, 2017  /  Last updated at 20:22 on November 9, 2017

EU lawmakers agreed a provisional deal on post-2020 EU ETS reforms in the early hours of Thursday morning, setting the market’s legislative framework to 2030 with supply-curbing measures that analysts expect to cause carbon prices to rise as high as €35 by 2023.

After more than nine hours and at around 0330 local time, envoys from the EU Parliament, Commission and Council of ministers meeting in Brussels reached agreement on the bill in the sixth closed-door negotiating session since last spring, some 28 months since the initial plan was first floated.

The deal over the first piece of legislation in the bloc’s suite of policies designed to help meet its 2030 emission reduction target of 40% under 1990 levels will allow ministers to tout the EU’s climate action leadership under the Paris Agreement at UN talks in Bonn next week.

“The deal is an improvement on [previous proposals], but it’s very clear that this won’t bring the major decarbonisation for industry that we need for Paris,” said Bas Eickhout, a Dutch Green party MEP who was part of the Parliament’s negotiating team.

“It provides a good basis but more is needed, for instance through national policies,” he added, speaking by phone from the Belgian capital.

The previous trilogue negotiating round held last month ran for a marathon 13 hours, ending at 0330 CEST without a deal because MEPs refused to budge on a restriction for cash flows in the ETS’ Phase 4 (2021-2030) from the bloc’s Modernisation Fund to projects that exceed a so-called Emissions Performance Standard (EPS) of 450g of CO2e/kWh.

Such a limit would effectively ban the financing of coal-fired power using public funding from EUA auction proceeds.

“Again tonight, the sticking point in the end was the Modernisation Fund,” said Eickhout.

He said the final deal did not contain the 450g provision, but rather had wording that would rule out the funding facilities that burn solid fossil fuels, with a small exception allowing poorer states Romania and Bulgaria to use some for district heating upgrades.

“It was a bit of a gift to them on basis of their lower GDP,” he added.

DEAL HIGHLIGHTS

The deal also includes a conditional measure where a triggering of the Cross-Sectoral Correction Factor (CSCF) would see three percentage points’ worth of EUAs transferred from the auctionable pot to the free allocation reserve.

That measure represented a compromise between the 2.5% and 5% shift in allowances sought by the Council and the Parliament respectively, with a 57% share of Phase 4 allowances to be sold by member states.

There was a further concession to heavy industry in the benchmark improvement rate to determine how quickly the free allocation share should be reduced to each industrial sector.

The deal kept the lowest benchmark improvement rate at just 0.2% a year rather than the Parliament’s targeted 0.25%.

MEPs failed to raise the size of the Innovation Fund to their proposed 600 million EUAs, instead the agreeing to the Council’s proposed 450 million, which was 50 million more than the Commission had suggested back in 2015.

Eickhout praised the “politically important” addition of a placeholder recital in the text requiring action to regulate shipping emissions under the EU ETS from 2023 should the UN’s IMO fail to take adequate global action by then.

Amongst the previously-agreed, top price-driving measures understood to have been officially agreed tonight:

  • The emissions cap will decrease by an annual linear reduction factor (LRF) of 2.2%, compared to 1.74% in Phase 3 (2013-2020), to achieve 43% cut in GHGs under 2005 levels by 2030.
  • There is no provision for use of international carbon credits for compliance.
    The annual permit withdrawal rate of the MSR was doubled to 24% for five years (2019-2023).
  • Should the number of allowances in the MSR from 2024 onwards exceed the number auctioned the previous year, the difference will be cancelled, further tightening supply.
  • Voluntary EUA cancellations by member states are permitted to offset the demand-sapping impact of overlapping climate and energy policies.

The entire provisional agreement still needs to be formally endorsed by member states and the full EU Parliament, in a process that could be completed before the end of the year and is usually done without difficulty.

EU envoys will discuss it at Coreper next week, and then it will be put to a vote in the Parliament’s environment committee (ENVI) on Nov. 28.

Once endorsed by both co-legislators, the revised ETS Directive will be published in the Official Journal of the Union, and will enter into force 20 days after that.

REACTION

Reaction to the agreement was expectedly mixed, especially within the business community.

Power generators represented by Eurelectric praised it, saying it gives investors the much-needed legal clarity required for decisions on low-carbon initiatives.

“It also restores confidence in the long-term functioning of the EU ETS in time before the entry into operation of the MSR,” said Eurelectric Secretary General Kristian Ruby.

In particular, the organisation applauded the doubling of the MSR’s intake and the rejection of the EPS, but said it expects a “more dynamic” rules-based adjustment measure for surplus allowance cancellations under the Energy Union Governance Regulation, and the LRF to be upped to 2.4%/year “at the earliest possible opportunity” in order to put the bloc on track to meeting its 2050 decarbonisation goal.

Emissions trading association IETA also welcomed the enhanced regulatory clarity from the trilogue deal, though warned that “there is still a lot to be done before the next phase of the EU ETS starts in 2021.”

“After the agreement is confirmed, the lengthy process of implementation work will start. The devil is often in details,” added Julia Michalak, IETA’s director of EU Policy.

The Confederation of European Paper Industries (CEPI) also welcomed the regulatory predictability the deal brought to a market that has been largely in flux over the past decade.

“A more stable regime and tools such as the ETS Innovation Fund will be crucial in accelerating the industry’s transition towards a low-carbon circular bioeconomy” said CEPI Director General Sylvain Lhôte, though he voiced concern over the fact that the MSR was “significantly amended without any prior assessment of its impact on industrial competitiveness and the risk of carbon leakage.

“This was an explicit requirement when amending the MSR decision. Likewise, no solution was found to effectively ensure compensation for indirect costs for exposed energy-intensive installations,” he added.

But other industrial associations bashed the deal for not providing enough protection to their big emitting members.

“Unfortunately, the deal does not deliver on securing sufficient free allowances for industries exposed to investment leakage. EU negotiators at COP23 in Bonn this week should therefore redouble efforts to bring to their industry a global level playing field,” said BusinessEurope’s Director General Markus J. Beyrer.

The organisation had called for a conditional 5% shift in allowances from the auction pot to the allocation reserve, and for the Innovation Fund to be funded with auctionable permits rather than free ones.

“Under this deal, the risk remains real that the CSCF could unduly remove free allowances from vulnerable carbon leakage sectors,” it added.

European steelmakers’ association Eurofer called the agreement “disappointing” for failing to recognise the full carbon content of unavoidable waste gases used in onsite power-generation facilities.

“Even the most efficient steel plants in Europe are likely to face significant costs resulting from the system”, added Eurofer Director General Axel Eggert.

Environmental groups also slammed the agreement, but for not going far enough to rein in emissions and to prevent more free handouts to polluters.

Carbon Market Watch (CMW) said the agreed provisions would lead to industry getting up to €170 billion in free allowances over the next decade, and governments foregoing that amount in auction revenues, after heavy manufacturers received billions in windfall profits since the ETS was launched in 2005, which CMW claims has led to “a standstill of industrial emissions for the past five years with no foreseen emission cuts in the coming decade.”

“The EU carbon market will continue to fail at its task to spur green investments and phase out coal.  Now individual governments must show climate leadership by pricing carbon nationally at levels that are high enough to avert dangerous climate change,” added Femke de Jong, CMW’s EU policy director.

WWF said the deal “makes Europe’s Paris Agreement climate commitments look meaningless”, and CAN Europe warned that it would only impact emissions levels in the long term rather than upon Phase 4’s start.

London-based Sandbag warned that a more ravenous MSR plus automatic cancellations would fail to cope with the massive allowance oversupply, which currently stands at around 1.7 billion and which the campaigners predict will inflate to around 2 billion by 2030 under the agreed measures.

This would prevent EUAs from rising significantly during this period, thereby putting more onus on national measures aimed at propping up prices, they added.

PRICES

EUA prices saw some volatility on the news at market open, though by midday in London the benchmark Dec-17 futures on ICE had stabilised about 10 cents above Wednesday’s €7.72 settlement.

Some traders had said an agreement could be immediately bullish, while others claimed the measures had largely been priced in and therefore EUAs could fall in a ‘buy on rumour, sell on news’ scenario.

EUAs have rallied since early summer, partly driven by optimism surrounding the reforms and adding as much as €3 to hit a 21-month high of €8.05 last month.

Most analysts expect prices to continue rising towards €10 through 2018.

The most bullish views foretell a topping of €20 in late 2020 and rising to €35 by 2023, while the most conservative estimates predict a €14 peak in 2020, with prices then drifting over the following decade.

By Ben Garside and Mike Szabo – news@carbon-pulse.com

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