By Dirk Forrister, President and CEO of the International Emissions Trading Association (IETA)

EU institutions, stakeholders and experts agree that the EU’s carbon market should serve as the centrepiece of Europe’s decarbonisation efforts. To reach enhanced climate ambition for 2030, the EU needs a well-functioning carbon market fostering cost-efficient emission reductions. However, this role has just been cast into doubt.

As the International Emissions Trading Association (IETA) we have vigorously supported the development of the EU Emissions Trading System (EU ETS), always with the goal of a liquid, transparent and efficient market mechanism that drives the EU’s decarbonisation.

In past years, we have applauded the continuous efforts by the European Commission and national authorities to ensure the integrity and proper functioning of the EU’s carbon market. After a period of structural challenges, the EU ETS is finally delivering a meaningful carbon price signal, fostering emission cuts, and boosting innovation. But while we cheer these achievements, they may soon be at stake if market restrictions that the European Parliament ENVI Committee voted in favour of materialising.

GETTING THE FACTS STRAIGHT

While voting on Dr Peter Liese’s report on the EU ETS Revision, members of the ENVI Committee supported a proposal to limit access to the EU‘s carbon market to compliance entities and designated representatives operating on their behalf. The intention behind this proposal was to curb speculation blamed for a steep carbon price increase observed in the last 16 months. It is a perfect example of how an inappropriate solution has been proposed because of an incorrect diagnosis.

There is enough evidence to demonstrate that the recent increase in the carbon price is driven mostly by policy changes and rising energy prices. The unprecedented rise in gas price, which has more than doubled in the last 12 months, together with the publication of the Fit For 55 Package and the proposal to increase the EU’s 2030 climate ambition, played a key role in supporting the EU carbon price.

This has been confirmed in multiple publications, namely the Commission Communication on Energy Prices, the recent report on the EU ETS functioning by the European Securities and Markets Authority, and the European Central Bank’s analysis on the role of speculation in the EU ETS.

LET THE MARKET BE A MARKET

Diversity of participation is essential to the proper functioning of the EU ETS. It supports liquidity, reduces price volatility, allows for risk transfer and ensures the regular, continuous transfer of allowances.

The proposal by the Environment Committee would limit access to EU registry accounts to compliance entities, or a nominated representative company that accesses the market on their behalf.

Restricting market access would impede the correct functioning of both the auctions and the long-term markets operated by exchanges and clearing houses. If they lose access to the registry, they will be unable to transfer allowances from the seller to the buyer.

Many smaller industrial companies also do not have the human resources or financial capability to access the wholesale market. To manage their long-term price risk they rely on better-resourced service providers and counterparties that are capable of delivering carbon allowances at a transparent price.

These counterparties are often banks and other financial firms, which provide market liquidity by buying and holding allowances. They assume an element of price and supply risk that would otherwise rest with compliance entities.

In futures markets, financial firms are playing an invaluable role by providing liquidity, allowing companies to buy allowances at the best price. Excluding banks and investment firms from the carbon market, would have a major consequence on the liquidity, increasing the compliance costs.

Furthermore, if a compliance entity is permitted to nominate only one representative company to access the market on its behalf, that company risks becoming subject to monopolistic pricing, as it cannot gather competing offers from a variety of potential suppliers.

DON’T THROW THE BABY OUT WITH THE BATHWATER

In the light of the war in Ukraine and the EU’s goal to become independent from Russian energy imports, a well-functioning EU ETS is of critical importance. A liquid and resilient EU carbon market supports the decarbonisation of European power and industrial sectors and allows them to implement cost-efficient emission reduction strategies. To put it straight, proposed market restrictions would make it more costly for corporates to deliver emissions cuts and reach their long-term climate targets.

At the June plenary session, the European Parliament will effectively vote on whether to continue with a market-based EU ETS, which until now has been the world’s most successful carbon market. Undermining the integrity of the EU ETS is at odds with the European Parliament’s declared support for the EU’s carbon market to remain a cornerstone of the EU’s policy to combat climate change.

The report on the EU ETS Review, adopted by the ENVI Committee, contains numerous valuable ideas on how to strengthen the EU ETS. Equally, the proposal on restricting market access is futile. On behalf of a wide range of carbon market participants that IETA represents, we urge Members of the European Parliament to remove the proposal in the plenary vote.

Dirk Forrister is the President and CEO of the International Emissions Trading Association (IETA). IETA is a non-profit business organisation created in June 1999 to establish a functional international framework for trading in greenhouse gas emission reductions. IETA membership includes leading international companies from across the carbon trading cycle.

This post originally appeared on Euractiv