It proposed some modifications to the operation of the European Union’s Emissions Trading System (EU ETS), with the aim of limiting the strong variability in carbon emissions. The initiative comes after pressure from some governments, including Italy, to alter the system to deal with a spike in prices linked to the Iran war.
The proposal provides for a supply “cushion”.
Under the proposal, the automatic cancellation of excess emissions allowances will stop. Rather than being cancelled, the extra allowances will be held in the Market Stability Reserve (MSR), acting as a supply ‘cushion’ that can be utilized in the future if the prices of emission allowances rise sharply.
Today, if there are more than 400 million allowances in the Market Stability Reserve, the excess part is cancelled. Around 3.2 billion allowances had been canceled by 2024, but annual cancellations are expected to decrease in the coming years as the European Union has planned to gradually reduce the total supply of emission allowances to ensure CO₂ emissions are reduced.
The Commission is optimistic, the markets are pessimistic
“We are keeping more rights in reserve than originally envisaged so that we can better manage possible price fluctuations in the future,” a senior European Union official declared, adding that the Commission is determined to maintain price stability.
Following the Commission’s announcement, the price of the main European carbon contract rose to around 74 euros per tonne of carbon dioxide on Wednesday afternoon as markets priced in no drastic alters to the system.
Trevor Sikorski, head of natural gas and emissions analysis at Energy Aspects, commented that the proposal “more displays that something is being done than actually alters how the system works”.
The Market Stability Reserve is designed to release an additional 75 million allowances into the market if the price of carbon in the European Union reaches levels 2.4 times higher than the average of the previous two years — a mechanism that remains unalterd under the new proposals.
Aim 11% of the cost in the accounts of the industries
The EU ETS, in operation since 2005, is the European Union’s main tool for reducing CO₂ emissions. Around 10,000 power plants and industrial facilities in Europe are required to acquire emission allowances for every tonne of CO₂ they emit. This cost corresponds to approximately 11% of the electricity bills of European industries.
The rising costs have prompted pressure from some leaders, including Italian Prime Minister Giorgia Meloni, who has even called for a temporary suspension of the EU ETS for power plants to limit the rise in energy prices linked to the Iran war. In contrast, other governments, such as those of Sweden and the Netherlands, warn that major alters could undermine Europe’s main tool to fight climate alter.
The European Commission is expected to present in July a wider reform of the EU ETS, aiming to redesign it for the next two decades. The reform may also include extconcludeing the free allocation of emissions allowances that certain industries receive in order to remain competitive in international markets.
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