EU Parliament and Council agree comprehensive reform package
The EU Council and the Parliament agreed a comprehensive reform of emissions trading. The agreement provides for the removal of more emissions allowances from the market than before. This means that the necessary scarcity in the market will occur in the early 2020s, creating powerful incentives for investments in climate action.
Federal Environment Minister Barbara Hendricks commented: "It is great that this agreement was reached after years of negotiation. The reform allows emissions trading, as an instrument, to finally make an impact in climate action after 2020. The reform also succeeded in establishing fair rules for industry. European industry will have to put in effort, but it will also be protected from unfair international competition. This much is clear: if we want to achieve our climate targets, emissions trading reform can support national climate policies, but it cannot replace them."
The overhaul eliminates the major problem in the previous emissions trading scheme. Before now, the incentives for investments in climate-friendly technologies were not sufficient due to a market glut of allowances. This is going to change. Thanks to the reform, the allowance surplus will be dismantled twice as quickly as previously planned. From 2019, 24 percent of the surplus will be removed from the market annually and transferred to the market stability reserve. This will establish shortage-related price incentives for emissions cuts in time for the next trading period.
Since allowances from the reserve can be returned to the market later, a second reform step was necessary. From 2023, the number of allowances held in reserve cannot exceed the number auctioned off in the previous year. Allowances above this limit – estimated at more than 1.5 billion allowances – will be removed from circulation for good. This sends an important message and shows that the EU takes long-term climate action seriously.
Other successful features of the reform include improvements in interlinking emissions trading and national measures. For instance, if a member country plans to decommission coal-fired power plants, it can remove allowances from the market to match the emissions savings. Before, the hypothetical risk existed that additional national savings in one country could be cancelled out by excessive emissions in another country. The market stability reserve helps with this problem too.
In addition, the reform ensures that energy-intensive industries are protected against unfair competition from abroad (carbon leakage). The deal continues the free allocation of allowances to endangered branches of industry. A safety buffer of 3 percent will be established, so that this area will no longer be subject to general cutbacks. Free allocations are not to exceed certain benchmarks, which will be based on the top 10 percent of the most efficient businesses in the particular sector. The benchmarks will be adjusted for technological progress each year.
The electricity sector, which is not subject to international competition, will be required to purchase allowances. The proceeds will be distributed among the member states for funding things like climate measures beyond emissions trading. In addition, revenue from auctions will be invested in two EU funds. Money in the Innovation Fund (3 percent of the total budget) is available to all member states for use on innovative projects in the areas of renewable energy, capture and storage of CO2 and prevention and reduction of greenhouse gas emissions in industry. Money from the Modernisation Fund (up to 2.5 percent of the total budget) is available to poorer European countries for modernising their energy supply and making it climate-friendly. These funds are primarily intended for projects promoting renewable energies, energy storage and the improvement of electric and heating grids.
The negotiation results must now be formally confirmed by the Council and the Parliament.