European Parliament adopts draft reform of carbon market post-2020

BRUSSELS (Reuters) - The European Parliament on Wednesday adopted draft reforms of the EU’s carbon market post-2020 that aim to balance greater cuts in greenhouse gases with protection for energy-intensive industries.

The European Union’s emission trading system (ETS), a cap-and-trade permit system to regulate industry pollution, has suffered from excess supply since the financial crisis, depressing its prices and heightening the need for reform.

But politicians and EU nations are divided over how best to fix the complex system, with industry and environment groups lobbying hard on opposing sides.

Reform efforts have also been overshadowed by Britain’s decision to quit the bloc, raising fears it would also leave the EU’s scheme, hammering prices.

The draft, adopted by 379-263 votes, rejected a more environmentally ambitious proposal for the faster removal of surplus carbon permits from the ETS - sparking criticism from climate campaigners.

Instead, it sticks with the EU executive’s proposal for the cap on emissions to fall by 2.2 percent per year - the so-called linear reduction factor - until at least 2024.

The Climate Action Network said it “betrayed the spirit” of the Paris accord to slow global warming, while Dutch green lawmaker Bas Eickhout said provisions to protect industry showed “the lobbyists have won out in the end.”

But leading policymakers called it the best compromise possible in tough talks. EU lawmakers will now enter negotiations with representatives of the bloc’s 28 governments to hammer out the final legislation.

The benchmark European carbon contract CFI2Zc1 fell by about 2 percent following the vote, hovering around 5 euros/tonne, but Thomson Reuters carbon analysts said the market reaction would be short-lived.

“The Parliament position significantly tightens the market balance,” said Hege Fjellheim, an analyst at Thomson Reuters.


The cap-and-trade system is the EU’s key tool to meet its goal of a 43 percent cut in greenhouse gases from industries and power plants covered by the market compared with 2005.

It aims to send a policy signal to encourage their investment in renewables and low-carbon electricity production.

In a bid to shore up prices, the Parliament’s proposal doubles the rate at which the scheme’s Market Stability Reserve (MSR) soaks up excess allowances to 24 percent per year from 2019. It also cancels 800 million carbon allowances from the MSR in 2021.

To minimise the risk of industry moving abroad to escape climate regulation, the draft allows for the share of allowances auctioned to be reduced by up to five percent to cushion against the impact of a cap on overall allocations, known as the cross-sectoral correction factor.

The cement industry, which some lawmakers had pushed to exclude from free allowances, will remain on the list of installations receiving handouts.

The deal drew mixed reactions from other industries. The steel, metal and chemical sectors welcomed the step towards adopting the long-awaited reforms but said they hoped for more safeguards for their competitiveness in continuing talks.

The shipping industry protested its inclusion under the scheme from 2023 in the draft proposal, which also calls for reforms to tighten emission controls on aviation.

However, lawmakers leading the reform have said the two provisions are likely to be traded away in upcoming negotiations with member states.

Additional reporting by Susanna Twidale and Angela Maytaal in London; Editing by David Evans and Ken Ferris