EU plans to introduce a Market Stability Reserve to curb EUA supply in its carbon market should be amended to avoid cutting the number of free allowances given to utilities, Poland has urged in a letter obtained by Bloomberg News, adding that if approved in its current draft form, the mechanism would breach EU law.
In the Mar. 4 letter sent to EU Climate and Energy Commissioner Miguel Arias Canete by Poland’s climate envoy Marcin Korolec, the country outlined three main issues it has with the MSR: its earlier-than-proposed start, its inclusion of the 900 million backloaded allowances from the current ETS trading phase, and its potential effect on the number of free EUAs to be allocated to utilities next decade.
Poland wants the quota of EUAs earmarked for mainly eastern European power producers to be exempted from any withdrawal of allowances from the market under the MSR.
“Without such an amendment, we could face a situation where the MSR would consume such an amount of allowances from the auctioning envelope of a given member state, that this envelope would not be big enough to guarantee allocation of allowances free of charge to energy producers that they would be due on the basis of earlier legal acts,” Korolec wrote in the letter, according to Bloomberg.
“I hope we could find an understanding and that we could reach a swift agreement on MSR that is legally sound and honours guidelines.”
Under current EU ETS rules, instead of having to buy EUAs at auction utilities in poorer EU nations can apply to receive a portion for free to help avoid electricity price spikes.
But in curbing excess supply in the ETS, the MSR could also reduce the number of EUAs handed out under the so-called ‘derogation’ process. Polish utilities are in line to receive an estimated 282 million free EUAs between 2021 and 2030 under current rules, Bloomberg reported.
According to an analysis accompanying Korolec’s letter, the number to be auctioned by Poland during that period would fall to 766.2 million from 984 million if the MSR is launched in 2021, and the number handed out for free would also be reduced accordingly.
Poland added that cutting the derogation quotas for utilities, as well as the proposed transfer of the 900 million backloaded EUAs into the reserve, were major sticking points for the country and that, if approved, they would breach both a 2008 agreement on EU climate targets and last October’s deal over the bloc’s 2030 goals.
“In my opinion, violating both (agreements) could not only delay work on the MSR but also undermine the delicate balance reached among our leaders in October and all this before an important period in international climate negotiations,” Korolec said, referring to upcoming UN-backed talks aimed at agreeing a global climate treaty.
Poland also reiterated its request to launch the MSR in 2021, a view supported by seven other mainly eastern European governments.
The European Parliament’s environment committee last month agreed to start the MSR in 2019, a decision that now requires support from the majority of MEPs as well as most member states before it can become law.
The group of eight EU nations opposed to an early start to the MSR theoretically have enough votes to block the 2019 start, meaning it will likely be up to current EU president Latvia to propose an acceptable compromise.
Talks on that could begin within a month, and according to a senior European Commission official are expected to conclude by the end of June.
By Mike Szabo – mike@carbon-pulse.com
