EU nations thrash out deal on carbon market reform

(This version of Feb 28 story corrects deal details on cancelling allowances after 2024, paragraphs 8,9)

The European Union and German nation flags are pictured before a debate on the consequences of the Brexit vote at the lower house of parliament Bundestag in Berlin, Germany, June 28, 2016. REUTERS/Fabrizio Bensch

BRUSSELS (Reuters) - EU nations reached a compromise on long-awaited reforms to the carbon emissions market on Tuesday, moving the European Union closer to adopting key rules to deliver on its pledge to cut greenhouse gas emissions under the Paris climate accord.

Eager to maintain its leadership on climate change diplomacy, EU environment ministers sought to bridge divisions over how to balance environmental ambitions with protection for energy-intensive industries in reforming the Emission Trading System (ETS).

The cap-and-trade permit system is the EU’s flagship policy to meet its goal of cutting greenhouse gas emissions from 11,000 energy-intensive industrial plants and power stations by 43 percent by 2030 when compared with levels in 2005.

But the market has suffered from an excess supply of permits since the financial crisis, which depressed prices.

Talks on reforms have dragged on for 18 months, with EU nations split over measures to strengthen prices, how not to impinge on competitiveness and how best to manage funds to help laggards modernise their economies.

“The negotiations have been going on all day; every country has had to compromise on something,” Italian minister Gian Luca Galleti told colleagues after the vote, saying Rome was still unhappy with some aspects of the deal.

Poland’s minister said he felt “cheated” by the deal, which 19 of the bloc’s 28 nations supported. Nine nations voted against it.

An earlier draft of the compromise deal seen by Reuters called for measures to strengthen prices by doubling the rate at which the scheme’s Market Stability Reserve (MSR) soaks up excess allowances and by cancelling surplus permits after 2024 held in the reserve above a ceiling of 650 million allowances.

However, the final deal, published on Thursday, calls for a yearly cancellation of allowances held in the reserve after 2024 above a threshold to be set by the number of allowances auctioned the previous year.

The deal also offers a cushion for industries worried about being short on allowances if a cap is triggered on overall allocations that slashes free allowances across the board, known as the cross-sectoral correction factor (CSCF).

Under the current ETS trading phase, which runs from 2013 to 2020, the majority of carbon permits are sold through government auctions, with most of the remainder given free to industry.

Tuesday’s deal calls for an additional 2 percent of the permits due to be auctioned to instead be freely doled out to industry if the CSCF is triggered.

“We are very happy that the council really showed the ambition that we need if we are going to stick to the Paris target,” Sweden’s climate minister Isabella Lovin told Reuters after the vote.

“I think the world needs climate leadership right now.”

Sweden, France and the Netherlands have led a push for measures to shore up permit prices, and reached a breakthrough at the start of talks when they won Germany’s support.

Germany, Italy, Austria and Greece, meanwhile, have prioritised measures to ensure that regulation does not drive big industry abroad, such as the provision for a more flexible auction share.

Poorer, coal-reliant nations in Central and Eastern Europe are keen to get the most generous provisions possible to help modernise their economies.

A minimum of 16 member states is required to back the compromise deal, representing at least 65 percent of the total EU population.

EU nations need a common position before beginning talks with the European Parliament and the European Commission to finalise EU legislation on the reforms tabled by the Commission more than a year ago.

The European Parliament last week adopted draft reforms of the carbon market that will go to plenary vote later this month.

Writing by Alissa de Carbonnel; Editing by Alexander Smith, Greg Mahlich