EU lawmakers back more ambition in carbon market reform

BRUSSELS (Reuters) - EU lawmakers on Thursday endorsed draft reforms of the carbon market post-2020 that aim to balance greater cuts in greenhouse gases with protection for energy-intensive industries.

The European Union’s market for carbon credits, essentially tradeable permits allowing industry to pollute, has suffered from excess supply since the economic crisis, depressing prices and heightening the need for reform.

The draft, backed by the European Parliament’s Environment Committee, calls for a faster removal of surplus carbon permits from the EU’s emission trading system from 2021.

The aim is to match the EU’s Paris climate pledge to cut emissions by 40 percent by 2030 compared to 1990 levels, and there are also provisions to minimize the risk of European industry relocating to avoid climate regulation.

“We have a strong endorsement for reform: We can begin to dry up the excess allowances,” said Scottish deputy Ian Duncan, who is guiding the bill through parliament.

The parliament’s biggest political group failed to back the inclusion of a 2.4 percent rate of annual reductions from 2021. But climate campaigners welcomed the move to help reach the EU’s goal of a 43 percent cut in greenhouse gases from industries and power plants covered by the market compared with 2005.

The EU executive’s proposal had called for the cap of emissions to decrease by 2.2 percent per year.

“We need to now do a little bit more careful tending of that particular element of the agreement,” Duncan told Reuters.


The committee’s proposal, adopted by 53-5 votes, will now go to a plenary vote in February. The EU’s three law making bodies - member states, the Commission and Parliament - will then start talks next year to thrash out a reform deal.

Benchmark European carbon prices rose to their highest in three weeks on Wednesday after lawmakers reached a compromise allowing for Thursday’s vote to go ahead.

“If finally adopted, such deal would significantly tighten the ETS market balance,” said Hæge Fjellheim, a carbon analyst at Thomson Reuters.

The proposal doubles the rate at which the Market Stability Reserve (MSR) soaks up excess allowances to 24 percent a year in the first four years after its entry into force in 2019.

In another bid to shore up prices, it cancels 800 million carbon allowances from the MSR, with another 200 million unused permits being scrapped if a cap on overall allocations known as the cross-sectoral correction factor (CSCF) is not triggered.

To protect industry, the draft allows for the share of allowances auctioned to be reduced by up to five percent in order to cushion against the impacts of CSCF.

It includes exemptions for the steel and fertilizer sectors, but establishes a border carbon adjustment measure for importers of certain goods, such as cement.

As well as including shipping in the ETS, the draft increases the EU’s clean technology fund to 600 million allowances and includes a fund for compensation for indirect costs to industry such as higher electricity charges.

The deal drew mixed reactions from industry. The cement lobby protested its exclusion from more free allowances while the steel and aluminum sector worried a higher carbon price could damage its competitiveness.

Additional reporting by Nerijus Adomaitis and Susanna Twidale; Editing by Alexander Smith and David Evans