More Carbon-Market Cuts Eyed as EU Parliament Starts Debate

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The European Parliament will consider enabling faster carbon reductions in Europe’s emissions market after an assessment in 2023, the strongest signal to date that a global climate deal may prompt tougher caps on companies.
Ian Duncan, the European Union assembly’s lead lawmaker on a reform of the world’s biggest cap-and-trade program, made the proposal in a draft report that kicks off legislative work on the post-2020 overhaul. The law, proposed to adjust the Emissions Trading System to EU climate goals for 2030, needs majority backing from the Parliament and weighted majority support from national governments to take effect.
The EU, which wants to lead the global fight against climate change, submitted its 2030 goal to cut carbon by at least 40 percent from 1990 levels under a United Nations deal reached by more than 190 nations in December in Paris. The countries agreed to meet in 2023 to assess how to step up ambitions toward capping global temperature increases since pre-industrial times to 2 degrees Celsius (3.6 degrees Fahrenheit).
“The Paris agreement has set a test for all of us, and our legislation must be fit to adapt to the new targets that Paris will produce,” Duncan said in a statement on Tuesday in Brussels. “Right now the ETS is like a car without an engine, we need to ensure it is fit to do the job it should and drive emissions reductions in Europe.”
Surplus Permits
Prices in the EU carbon market, which imposes decreasing pollution caps on more than 11,000 facilities owned by utilities and manufacturers, have fallen more than 70 percent in the past eight years as an economic crisis aggravated a surplus of emission permits. Amid sluggish economic growth in Europe, splits exist among EU governments and the bloc’s Parliament members over further tightening of the program after policy makers last year agreed a supply fix that will take effect in 2019.
To help strengthen the market, Duncan proposed an option to increase after 2023 the annual pace of carbon reductions in the ETS from the 2.2 percent agreed by EU leaders in 2014. Such a change would need a political nod from those same leaders and a separate legislative proposal by the European Commission, the EU regulatory arm.
Duncan also put forward a plan to empower national governments to retire carbon allowances linked to closures of power plants, a move that would help avoid aggravating the surplus of permits. To strengthen the market, he wants the commission to take steps if overlapping EU policies on climate, energy efficiency and renewables undermine demand in the ETS.
“My report contains a triple lock on ambition,” Duncan said. “Each of these factors could be significant in easing market depression.”
Possible Resistance
Beyond possible political resistance in national capitals, Duncan’s ideas face potential hurdles within the 28-nation Parliament including his own group. A British member of the European Conservatives and Reformists group, the assembly’s third-biggest faction, Duncan may encounter skepticism from Polish members of the ECR and from leaders of the Christian Democrats and Socialists, the top two groups.
Ivo Belet, a Belgian member of the Christian Democrats, said his group is opposed to anticipating at this stage a possible steeper cut in emission permits after 2023.
“Saying now, from the beginning, that we want to open the door for a change of the linear reduction factor is not a good position,” Belet said by phone.
In addition to his triple-lock on ambition, Duncan proposed modified rules on handing out allowances to companies deemed liable to relocate to regions without pollution curbs, a phenomenon known as carbon leakage. He wants to introduce a tiered approach, or varying levels of free permit allocation to companies depending on how big a risk they face. The aim is to avoid the so-called correction factor, which the commission is entitled to apply across industries to ensure that the total number of free allowances requested by governments doesn’t exceed the maximum allowed under EU law.
Innovation Fund
Should the correction factor kick in at any time in the post-2020 period, as much as 2 percent of allowances to be auctioned would be moved to the free-allocation pot to alleviate the impact on the industry, under Duncan’s recommendation. The commission wants to keep the share of allowances to be sold at auctions at 57 percent in the next decade.
The draft report also includes a proposal to top up 400 million allowances proposed by the commission for the innovation fund with 150 million unallocated allowances and to ease the criteria to access the fund.
The report will be considered by the EU Parliament’s environment committee, which leads the assembly’s work on the carbon-market reform, on June 21 and Duncan’s colleagues will have until June 28 to submit their own amendments, which will be discussed on Sept. 8. The panel is scheduled to vote on its position on Dec. 8. The whole package of legislation could take a year or longer to win the final approval from the full 751-seat assembly and from EU governments.