(adds carbon prices, quotes)

The European Parliament approved the EU Emission Trading Scheme’s Market Stability Reserve (MSR) in a vote on Wednesday, sending the proposal to EU ministers for a final nod in September.

Some 495 MEPs voted in favour, 158 against, with 49 abstentions at the full parliament in Strasbourg.

EU environment ministers are widely expected to endorse the bill to automatically regulate allowance supply in the ETS at a Sept 18 meeting.

“The Market Stability Reserve is an efficient, market-driven tool that will stabilise our ETS system and thereby save the central pillar of Europe’s sustainability and climate policy,” said Ivo Belet, the Belgian centre-right EPP member who steered the bill through the parliament.

Carbon 101: How will the MSR work?

The sign-off, like today’s parliament vote, is seen as a procedural step as member state officials already approved the MSR text in early May, despite the objection of six eastern EU governments to bringing the start date forward to 2019 from 2021.

Analysts expect the mechanism to push carbon prices towards €15 by the end of the decade, around double current levels, according to a recent Carbon Pulse poll.

James Cooper, an analyst at Bloomberg New Energy Finance, said: “The MSR will change the way the EU ETS works, creating a short market by the early 2020s. BNEF expects prices to rise towards abatement levels over €30/t by 2021.”

The benchmark front-year futures contract was trading at €7.52 in the minutes after the afternoon vote, two cents below its level just before the ballot was cast.

Market watchers had anticipated the parliament’s approval and expected prices to drop slightly once this was confirmed as traders looked to sell to lock-in profit.

Dialogue: What does the MSR deal mean for the ETS and EU carbon prices?

Today’s approval came after a trilogue deal between envoys from the European Parliament, Council and Commission, which strengthened the original Commission proposal by having it start earlier and be filled with backloaded and unallocated allowances from the current trading phase.

The eastern states, some heavy industry and right-wing lawmakers were wary that the strengthened bill would push up energy prices and reduce the bloc’s international competitiveness.

Lawmakers overcame a blocking minority of Council opposition by convincing the Czech Republic and Lithuania to defect by agreeing a clause to leave a pot of EUAs for poorer states untouched by the reserve until 2025.

REACTIONS

Lawmakers:

Peter Liese, centre-right EPP: “The agreement adopted today is very close to our position and will put the ETS back on track. It drives climate-friendly innovation in a cost-effective way – much better than any national measure under discussion at the moment.”

Matthias Groote, socialist S&D: “The EU ETS will finally be able to breathe and respond to cyclical changes. It was a defective model before, but now the ETS can function in reality.”

Bas Eickhout, Greens/EFA: “A welcome step… It is important to note however, that the MSR will not be a permanent fix to the enormous surplus in the EU ETS, which will, if left unaddressed, undermine the integrity of future climate targets.”

Gerben-Jan Gerbrandy, liberal ALDE: “Today’s vote truly strengthens the carbon market and will gradually put an end to the surpluses that have paralysed the carbon market over the last years. Importantly, industrial innovation will get a boost thanks to new funds for low-carbon industry projects.”

Merja Kyllonen, green-left GUE/NGL: “I have mixed feelings. Perhaps the MSR isn’t the ideal solution but a possible step forward. I’d rather fix something we’ve got that spend time on something new. There are many members in my group that don’t think it will fix the ETS.”

Antonio Tajani MEP and chair of Parliament’s industry committee: “We have managed to strike the right balance between industry and climate policies, which should be mutually reinforcing. The EPP Group has obtained important safeguards for industry. Strong carbon leakage provisions and adequate thresholds for the activation of the MSR will allow industry to adapt to the new system without additional costs.”

Eleonora Evi, right-wing EFD: “The ETS means financial speculation. It’s a swindle that favours tax avoidance.” (voted to reject).

Environmental campaigners:

Geneviève Pons, WWF: “Today’s agreement goes some way in reducing the oversupply of ETS pollution permits on the market. But not quickly enough, and not permanently. These toxic tonnes could continue to haunt the EU’s carbon market, unless the European Commission gets its act together in the post-2020 reform.”

Damien Morris,  Sandbag: “Now that the European Parliament has agreed to place excess carbon allowances in the Market Stability Reserve it needs to keep them there.”

Business groups:

Sarah Deblock, carbon trading association IETA: “IETA welcomes today’s vote by the European Parliament to create a reserve that allows the system to be more flexible to changing circumstances. The adoption of the MSR reconfirms the political support for the EU ETS to play a central role in the EU’s strategy to reduce emissions cost-effectively.”

Kristian Ruby, European Wind Energy Association: “The ETS needs root and branch reform. The instrument must be realigned with Europe’s political ambition on climate change. The removal of surplus permits and the elimination of free allocation would be the first steps to achieving this.”

By Ben Garside – ben@carbon-pulse.com

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