EU member state officials agreed a common position over the MSR late on Wednesday that would see the mechanism absorb the 900 million backloaded allowances from 2018 but start operating in 2021, a launch date at odds with the European Parliament’s stance.
Current EU presidency holder Latvia had previously proposed a start “no later than 2021”, but a spokesman for the government said a firm 2021 start date had now been agreed by member states in the Council of the European Union.
The 28 EU governments also managed to bridge an east-west divide by agreeing that the fate of potentially hundreds of millions of unallocated EUAs be addressed by the European Commission as part of the upcoming ETS Directive review.
The countries agreed to give Latvia a mandate to enter into trilogue talks on the final MSR text with the European Commission and the European Parliament, which wants an earlier start and the unallocated allowances to be placed in the reserve at the end of the current trading phase rather than sold.
“Trilogue talks are now due to start on Mar. 30, and the fate of the unallocated allowances is going to be the key issue,” said Sanjeev Kumar, head of environmental campaign group Change Partnership.
Germany, Britain and the group of western European countries favoured an earlier start for the MSR, while Poland and a blocking minority had refused to budge on the 2021 date originally proposed by the European Commission.
Both the Parliament and the Council must agree on the final text for the bill to be made law.
This evening’s breakthrough came hours after the officials meeting in Brussels failed to find common ground on the matter during their first attempt earlier in the day, which led to EU carbon prices falling by more than 4%.
EUAs climbed back above €7 in the afternoon on word that western EU governments were pressing for a common position to be found today.
Traders were mixed as to their expectations of how prices would react tomorrow.
“Expect a price jump tomorrow morning. Markets love certainty, well at least big steps towards it,” said Louis Redshaw, head of Redshaw Advisors, on Twitter.
“The (member states’) position on 2021 starting date seems very strong. Don’t see this (as) so bullish for the market”, responded Lorenzo Monaco, a cross commodity trader at Italy’s Electrade S.p.A., also via Twitter.
But other market participants were more concerned over the fate of any EUAs not handed out during this trading phase than the start date – a glut that some analysts have estimated could top 750 million by the end of the decade.
Current EU rules state that these are to be sold, but MEPs would rather they be injected into the MSR.
“It doesn’t make sense not to address the potential overhang of unallocated EUAs as this will render the MSR totally ineffective, but I trust the European Commission will be capable of dealing with this properly in the review,” said Peter de Waal, a trader with Investment Synergy Group GmbH.
The member states’ position sets Latvia on a collision course with Parliamentary envoys, as senior MEPs have already warned that the EU assembly would not accept a 2021 start.
Belgian MEP Ivo Belet, who will lead Parliament negotiators, will enter the trilogue talks with a strong mandate after all major political parties in the assembly’s environment committee voted for the MSR to start before 2019.
His hand is further strengthened by the knowledge that at least 15 governments side with MEPs and favour an earlier start.
“Parliament has a strong position and the strategy (of Western nations) might be to agree something in the middle, so once it comes back from trilogue to the EU Council they could put pressure on the weaker links in the blocking minority,” a fourth trader added.
By Ben Garside and Mike Szabo – firstname.lastname@example.org