The European Parliament’s environment committee met on Thursday for its first formal hearing on the EU’s post-2020 ETS reform proposal.

It’s still early days for the bill but Carbon Pulse has identified several key takeaways from the discussion that will shape the wider debate this year.

1) You can change anything you like, unless it’s ambition

Europe’s climate commissioner Miguel Arias Canete addressed the 69-strong cross-party body, stressing that the bill “was not a closed proposal” and “can be improved in many areas” by the Parliament.

“The Parliament has much more margin than the Commission, as we had to follow the Council’s decision,” he said, referring to the Oct. 2014 agreement by EU leaders on the bloc’s 2030 climate and energy targets.

But the commissioner hinted that the bloc’s executive was unlikely to propose deeper overall emissions reduction targets in the wake of December’s Paris Agreement.

“The EU’s 2030 target is consistent with what the world agreed in Paris … it is not the time nor the place to provide quick answers of ‘if’ or ‘how’ [changes to] that should be done. There is ample time to debate the ambition of the EU commitment in the review mechanism,” he said, referring to the global stock-take process outlined in the Paris Agreement and starting in 2018.

The Commission is currently preparing a guidance paper for EU leaders, who will meet on Mar. 17-18 to discuss whether to review the 2030 goals in light of Paris.

Parliamentary sources told Carbon Pulse that a draft version of that document was being circulated by Commission officials, but it had yet to be discussed by commissioners and was likely to be changed further in the coming weeks.

A leaked copy of that draft said the Council’s decision in Oct. 2014 will not require a near-term revision until after the 2018 global stocktake and that the system of free EUA allocations beyond 2020 should be upheld but kept under review, because it will only become evident in the coming years how other countries are implementing their targets, Argus Media reported.

Read our analysis on why EU leaders are unlikely to budge on the 2030 GHG goal

Some MEPs seemed keen to propose deeper EU emission reduction goals themselves.

Swedish Socialist Jytte Guteland said the EU needed to consider a more ambitious linear reduction factor (LRF) for the ETS, and Dutch Greens MEP Bas Eickhout pointed out that the proposed -2.2% LRF won’t lead to a level consistent with Paris’ 2C temperature goal. (Commission officials also admit this)

German centre-right MEP Peter Liese of the European People’s Party (EPP) said the Parliament could improve the proposal, which “at least shouldn’t be less ambitious.”

2) The EU’s steel industry woes are not due to the EU ETS

“The steel sector’s problems are not down to the ETS, let’s be honest,” said Arias Canete.

He said the industry’s recent woes stemmed more from China’s steel overcapacity and economic slowdown, and the cost of energy was steel’s “real challenge”, pointing out that the EU has been a net exporter of steel since 2009.

Axel Eggert of steel lobby Eurofer largely agreed with those reasons. He said it was future ETS prospects, not current carbon prices, which were his main concern.

“We have lost over 90,000 jobs since 2009, [and] 7,000 in last couple of months. There are various reasons for [these losses] but [the industry’s concern with the ETS is about] the perspective for the EU ETS, I’m not talking about current situation,” he said.

Eggert said the industry’s free EUA allocation would last until the end of the current trading period (in 2020), but that this did not help meet added indirect ETS costs due to higher electricity prices.

He pointed to an Ecofys study commissioned by Eurofer that said net ETS costs for steelmakers were around €500 million in 2013.

Damien Morris of environmental campaigners Sandbag added that the Ecofys figures didn’t include the steel sector’s banked EUA surplus, which he said amounted to 220 million carbon units over 2008-2014.

3) Look out shippers and farmers… All sectors must contribute

Amid rising domestic emission reduction costs, several speakers stressed that no part of the economy should get a free pass while ETS-regulated sectors face ever-tightening emissions caps.

“We need to consider extending the scope (of the ETS) to more sectors, to shipping for example,” said Sweden’s Guteland, a view echoed by fellow Socialist Jose Faria.

“Others have to bring more to the table,” added Germany’s Liese, singling out aviation and agriculture specifically.

“Non-ETS sectors should contribute their fair share,” said Giuseppe Montesano of power industry association Eurelectric, adding that his sector could play a part in cutting transport emissions via the electrification of vehicles.

Poland’s Jadwiga Wisniewska of the centre-right eurosceptic ECR group raised the more controversial issue of allowing forest carbon sinks to count against targets in other sectors.

“Countries with huge forest potential cannot currently take this into account,” she said.

Commissioner Arias Canete responded: “We have to take note of sinks but also of the emissions of agriculture”. He said these areas would be covered by the Commission’s non-ETS proposal due before August.

4) More tiers before bedtime

The Commission has proposed a two-tiered free allocation through 2030 to industry threatened by carbon leakage, with some firms getting 100% of required EUAs and others just 30%.

But pressure is mounting to divide this up even further, and several MEPs used today’s meeting to join that chorus.

Belgium’s Ivo Belet and Germany’s Liese of the EPP both spoke of the need to increase the number of tiers.

“It is urgent to have more categories for more targeting. It should be possible to have a curve where those more at risk get more for free,” said Liese.

Sandbag’s Morris and ICIS Tschach Solutions carbon analyst Philipp Ruf said more tiers would help to ensure the limited free allocation was better targeted at sectors more exposed to international competition.

In response, Arias Canete issued a warning: “A more tiered approach is a possibility. It can be two, three, four, five, or 10 tiers. Each time things become more complex.”

“[The Commission] dedicated a long time to this. For simplicity and targeting more exposed sectors we thought our approach was right, but we are open to discussion and will provide information about the consequences.”

5) The EU is not alone, but it might as well be

No MEP responded to a call by Geneviève Pons-Deladrière of environmental campaigners WWF to scale back free allocation because of the diminishing risk of carbon leakage.

EU leaders agreed in 2014 that free handouts would continue only “as long as no comparable efforts are undertaken in other major economies”.

Despite the Paris Agreement binding all nations to curb emissions from 2020, Arias Canete insisted they would still be necessary.

“We should see a gradual levelling of the playing field, but we are not naive. This will not happen overnight,” he told the MEPs.

Far from calling for the handouts to be scaled back, many lawmakers focused their interventions on how the level of free allocation would continue.

Polish EPP member Andrzej Grzyb said that without free allocations, “pressure will grow and production will be reallocated outside EU.”

“I would be tempted to clap if this was a kind of ‘Care Bear’ world, but it’s not. It’s not a ‘fuddy duddy’ world … I’m not sure China is going to be 100% behind us. What if other continents don’t follow suit?” said French Socialist Edouard Martin, who called for border adjustments, also known as carbon tariffs, to help counter this.

By Ben Garside – ben@carbon-pulse.com