(Updates with additional takeaway points, more reaction)

Below are key takeaways from, and selected reactions to, the post-2020 EU ETS reform proposals released today by the European Commission:

What’s new – Proposed changes to the ETS Directive:

• EU ETS cap to decrease by 2.2% annually, compared to 1.74% in Phase 3 (2013-2020), to achieve 43% reduction from 2005 levels by 2030, equating to additional cuts of 556 mln tonnes of CO2e next decade.
• Carbon prices estimated to average €25 over Phase 4 (2021-2030).
• 250 mln unallocated allowances to be taken from MSR and put in Phase 4 new entrants reserve.
• Further unallocated Phase 3 EUAs not previously captured under MSR proposals, estimated at 145 million, to be put into Phase 4 new entrants reserve.
• 400 mln allowances from Phase 4 to be put in an innovation fund, along with 50 million unallocated Phase 3 allowances pulled from MSR.
  • Sale of 400 mln estimated to raise up to €10 bln.
  • Scope of fund extended from carbon capture and storage and renewables to include industrial carbon-cutting efforts.
• Tiered carbon leakage free allocation to industry, with some getting 100% of required EUAs, and others just 30%.
  • The 177 industrial sectors currently getting 100% of their required EUAs for free will be cut down to 50 sectors, with the remaining seeing their quotas chopped to 30%.
  • Free allocations decided for five years at a time, according to revised benchmarks in each period.
• Allows factories to get more free EUAs for production increases – in contrast to current rules that only allow this if new capacity is built.
• 57% of all EU Allowances to be auctioned in Phase 4 (same % as Phase 3).
  • 55% sold as normal by member states.
  • 2% of all allowances to be put in a Modernisation Fund for member states that in 2013 had a GDP per capita below 60% of the EU average.
• Revenues from the sale of approximately 310 mln EUAs in Modernisation Fund, which are estimated to be as high as €8 bln, to be distributed as follows:

Bulgaria – 5.84%
Czech Rep. – 15.59%
Estonia – 2.78%
Croatia – 3.14%
Latvia – 1.44%
Lithuania – 2.57%
Hungary – 7.12%
Poland – 43.41%
Romania – 11.98%
Slovakia – 6.13%

• No provision for use of international carbon credits for compliance.
• Extent of “limited, one-off” measure for richer member states to cancel part of their auction volume to help meet non-ETS targets defined in a seperate non-ETS sector proposal in early 2016. See more here.

Related reading: How will the EU Emissions Trading Scheme’s MSR work?

What remains the same – Features carried over from Phase 3:

• 10% of allowances to be sold (so 5.5% of all Phase 4 allowances) distributed amongst poorer member states for purposes of solidarity, growth and power interconnections.
• Poorer member states can continue to apply for free allowances for their utilities in exchange for pledging to modernise the sector – a continuation of 10c derogation programme.
• Leaves member states to decide whether to provide compensation to companies exposed to indirect carbon costs (those passed on through electricity prices), but strengthens wording from ‘may’ to ‘should’ provide this compensation.
• Leaves to member states to decide how to spend auction revenues (but says they “should” promote skill formation and the reallocation of labour in sectors affected by decarbonisation, as well as help poorer developing nations deal with climate change).
• Provision for member states to continue to exempt small emitters with high EU ETS admin costs if they make equivalent contribution to cut emissions, and to add more SMEs to that list from 2021.
• Allowances from 2021 “shall include an indication showing in which 10-year period they were issued, and be valid for the first year of that period onwards”.
• No mention of aviation, for which only domestic flights are regulated, subject to a Commission proposal due in late 2016 based on a decision at ICAO.

What they said – Reactions from industry, lawmakers, green groups:

Many stakeholders broadly welcomed the proposal, but most also pressed for ways it should be changed, suggesting lawmakers will face fierce lobbying over the coming months as they begin debating it.

INDUSTRY GROUPS:

Markus Beyrer, Director General of European business association BUSINESSEUROPE:

“The Commission’s proposal is failing to safeguard the competitiveness of European industries. It does not match with the objective of keeping a strong and competitive industrial base in Europe. By unnecessarily reducing the volume of free CO2 emission allowances so drastically, it raises the risk of investment leakage, exposing our industries to unfair competition from countries without comparable climate efforts.

We nonetheless acknowledge the efforts to increase the threshold for the innovation fund which will support innovative low-carbon technologies and processes from industry.”

Axel Eggert, Director General of European steel association EUROFER:

“Employment in the European steel industry has dropped by over 20% compared to levels in the sector before the economic crisis and EU steel demand is still 25% below pre-crisis levels. If not adjusted and improved, the Commission’s new ETS proposal will deliver another major blow to our sector.

“In particular, the proposal fails to secure a global level playing field. This is because even the most efficient European steel plants will experience excessive additional costs not borne by their global competitors. This uneven distribution of costs is due to the continuation of the cross-sectoral correction factor, as well as the artificial reduction of the performance benchmarks. Both of these arbitrary moves cut free emissions rights down below technically feasible levels. Finally, it does not provide the necessary legal certainty that indirect carbon costs passed through in electricity prices will be offset in all member states. Presently, 22 member states do not offset any of these unilateral EU costs … The EU needs to stop exporting jobs and importing CO2.”

Sarah Deblock, Director of European Policy at the International Emissions Trading Association:

“International credits have a role to play in meeting Europe’s wider emission reduction goals. We firmly believe that the option to use them should be preserved.

IETA members have put forward strong proposals on the use of auction revenues to support climate action in developing countries, which could include the purchase high-quality offsets. This would help all nations to play a role in the climate change response, and we are encouraged to see the European Commission proposing that member states reinvest carbon auction revenues to finance climate action in third countries.”

Kristian Ruby, Chief Policy Officer at the European Wind Energy Association:

“The removal of surplus permits and the phase-out of free allocation are the first steps to transitioning member state economies towards more sustainable, decarbonised and cost-effective forms of energy such as onshore wind, but Europe has room to go much further. The ETS needs a root and branch overhaul. The ambition of the reforms laid out (today) will not be enough to guarantee a fuel switch and drive investments in renewables.

While the ETS is Europe’s flagship policy, it must not be left to sail alone. The European Commission needs to set in place complimentary measures that will buttress the EU’s carbon market. These measures must include a strong market design and clear rules to ensure the 27% renewable energy target is met by 2030.”

Marco Mensink, Director General of the Confederation of European Paper Industries:

“The proposal shows the member states cannot have their cake and eat it. If policymakers in Brussels and the member states are serious on growths and jobs, the fixed share of free allocation should be changed to really protect industry as agreed by the heads of state.

The proposal does however not solve the lack of free allocation for Combined Heat and Power Plants in Europe, which has been an additional factor in closing down very carbon-efficient gas-fired energy plants in Europe. The pulp and paper industry is a leading CHP sector, producing over 50% of its electricity consumption by itself.”

Guy Thiran, Director Generals of European non-ferrous metals association Eurometaux:

“Today’s proposals ignore the European Council’s request that best performers should be protected from any undue indirect carbon costs, with the system to remain largely unchanged. Regrettably, although several alternatives were offered for EU-level compensation of indirect costs, administrative simplicity has prevailed over the competitiveness of Europe’s electro-intensive industries.”

ENVIRONMENTAL AND DEVELOPMENT GROUPS:

Geneviève Pons, Director of the WWF European Policy Office:

“This proposal fails to show how the EU ETS will ensure that Europe’s largest polluters pay a meaningful price for their carbon pollution. The European Commission is setting Europe’s carbon market up for another decade of failure. Reducing the effectiveness of European climate policy in order to appease vested economic interests is unacceptable.

The idea to finance CO2 reductions and clean technologies through a meaningful price on carbon is the right one. This should be strengthened through more earmarking of ETS auctioning revenues and can send an encouraging signal ahead of the international climate negotiations in Paris later this year. The other European institutions have to act responsibly and intervene to rescue the EU ETS from redundancy and to deliver a carbon market with society wide benefits.”

Lies Craeynest, Oxfam’s EU policy advisor:

“The European Commission has wasted an opportunity to make its flagship climate tool fit for purpose by offering compensation to heavy polluters instead of making pollution pricing work for low carbon development and climate change adaptation in poor countries. By failing to make the sale of pollution permits pay for clean development and climate adaptation abroad, the European Commission has lost an opportunity to restore its international climate leadership, and leaves the people most impacted by climate change without additional support. It’s time for EU leaders to step in and realize the need to overcome roadblocks to an agreement in Paris. Making pollution pricing pay for climate action should be a no-brainer for EU leaders to signal how they will stop using existing aid and instead deliver additional support to fund climate action in vulnerable countries.”

Damien Morris, Head of Policy at environmental campaigners Sandbag: 

“This proposal is a step backwards in curbing the oversupply of allowances on the market. The nasty surprise for environmentalists is that we were cheated out of some of the ‘unallocated’ allowances we thought had been placed in the market stability reserve. Worse, the Commission is looking to raid the reserve for a further 300 million allowances. We should be carving allowances for innovation and new entrants out of the new carbon budget, not pillaging the MSR for these.”

Wendel Trio, director of CAN Europe:

“The proposal does not take into account that the EU Council explicitly decided that the EU should reduce its greenhouse gas emissions by ‘at least’ 40%. Fixing the ETS would mean setting a more ambitious target and cancelling the 2.5 to 4.5 billion surplus allowances that will have accumulated by 2020. This would ensure that the EU’s climate targets are met by actual emission reductions rather than with left over surplus.”

LAWMAKERS:

Bas Eickhout, Dutch Green MEP:

“This ETS proposal is about muddling through instead of reforming. The Commission has failed to correct the overly generous carbon leakage criteria and proposes to continue categorizing nearly all industrial emissions under ETS as subject to ‘significant risk of carbon leakage’ despite the lack of evidence. Gift after gift is given to the Central European power sector, while these companies continue to make enormous windfall profits by passing on to consumers costs that were never actually incurred. In addition, the Commission has once again missed the opportunity to permanently remove from the market the massive surplus of allowances that depress the carbon price and risk undermining future climate targets.

Disappointingly, the Commission is also already backtracking on the agreement made during the MSR negotiations and will give industry millions of allowances that were intended for the reserve. By using leftover allowances from the pre-2020 period to top up post-2020 allocations to industry, the Commission is undermining the 2030 greenhouse gas reduction target. The Commission seems to have given up its right of initiative and turned into the secretariat of the European Council.”

Jan Gerbrandy, Dutch ALDE MEP:

“We must also ensure that the free allocation of carbon allowances to power plants in Central and Eastern Europe won’t distort the Energy Union and the emerging European electricity sector.”

Françoise Grossetête, French EPP MEP:

“The proposal for a reform of the carbon market after 2020 is an essential step forward and will be of major significance for the future of the European Union’s energy and climate policy. It strikes a good balance by taking into account both the climate challenges and the competitiveness of European industry.”

MARKET ANALYSTS:

Analysts at Thomson Reuters Point Carbon:

“How to share the free allocation among the different industry sectors will likely be the most controversial issue in the legislative process. The Commission’s proposal suggests a steady decrease in the free allocation to all industry sectors. In addition, it includes a new formula to identify the sectors most exposed to the risk of carbon leakage. Both these elements will likely be contested as being too ambitious by affected stakeholders and could cause some intense political debate.

Today’s proposal does not drastically change the outlook for the overall supply of allowances but rather reshuffles the amount of free allocation vs. auctioning.  We now expect European carbon prices (in real 2014 terms) reaching  €17 in 2020, rising to €30 in 2030.”

By Mike Szabo and Ben Garside – mike@carbon-pulse.com

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