The European Commission’s post-2020 ETS review proposes to keep allocating a higher share of carbon allowance auction revenue to poorer member states via a new Modernisation Fund, but aims to tighten scrutiny on how governments spend it.

The Fund forms one part of a package of measures aiming to transfer cash from richer western EU states to poorer ones in the east to ensure the bloc speaks with one voice on climate protection and to help channel finance to where emission cuts can be made more cheaply.

HOW MUCH MONEY?

The Modernisation Fund portions around 310 million allowances, 2% of the overall quantity over ETS Phase 4 (2021-2030) and portioned from the 57% of allowances that are due to be auctioned. The Commission estimates they can be sold for €8 billion.

This maintains the same share of allowances as under the current Phase 3, but revenue from those units faced no spending scrutiny and were ostensibly given out to reflect early action on emission reductions that occurred in former Soviet states in the early 1990s when those economies collapsed.

This time, the stated reason for the extra distribution is that poorer EU states’ energy sectors are relatively carbon-intensive with ageing infrastructure and a large potential to make energy saving improvements.

WHO GETS IT?

Countries qualifying for the cash had to have per capita GDP of less than 60% of the EU average in 2013, and the funds will be handed out in the following proportions:

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%

The beneficiary Member States will propose a pipeline of possible projects, from which those to receive funding will be selected with particular attention on smaller-scale projects.

The Commission proposes that a balanced governance structure will be established with an investment board responsible for the rules and guidelines and a management committee responsible for the day-to-day management, including project selection.

The investment board and the management committee will include representatives from member states, the European Investment Bank (EIB) and the Commission.

MARKET IMPACT?

The Commission proposal said the allowances for the Modernisation Fund will be auctioned according to the same rules as other allowances but did not specify when the allowances will be sold.

Because the allocation is drawn from a pot that was due to be sold anyway the sales won’t add to the overall supply but it is likely sales will be more concentrated in the earlier part of the trading phase to get cash flowing.

“To be able to sell the EUAs to create funds to be distributed, the Fund may have to remove more from the front-end than it takes from the back-end,” said Trevor Sikorski, an analyst at Energy Aspects.

STICKING POINTS

• Unfair advantage?

In addition to the Fund, eight of the 10 member states will also be able to take advantage of a continued, if scaled-down, derogation in the ETS Directive that enables governments to give some free allowances to their power sector if they invest to upgrade their fleet and diversify supply.

The combined provisions amount to billions of euros in incentives not available in other parts of the bloc, which could clash with the EU’s efforts to connect and open up its power markets and raise concerns among western utilities seeking a more level playing field.

• Governance

Recipient governments are likely to seek greater autonomy over how they choose to spend the cash. Poland has already warned it will be seeking to control the investment board.  Environmental campaigners, along with MEPs, will want closer central scrutiny of spending after complaining that controls over the current ‘derogation’ investments to upgrade energy infrastructure are too lax.

The campaigners warn against repeating the policy they say has wasted billions meant to be spent on cutting emissions by failing to tighten up on rules that have already allowed eastern states to extend the lifespans of highly polluting power plants and plug holes in their national budgets.

EU documents show that in Poland, which has by far the biggest share of allowances handed out for free under the derogation, 82% of the 378 planned investments are to modernise existing coal and gas-burning plants and none are for solar or wind power generation.

Not all states entitled to the derogation have taken advantage of it and some have not applied for their full entitlement as their utilities have failed to come up with a pipeline of investments.

NEXT STEPS

The Commission proposal must be agreed by a majority of the EU Parliament and member states in the Council, a process that could take at least two years.

The timing for when the allowances will be set out in a subsequent regulation under a more simplified process once the main ETS proposal is made law, meaning work on this is not likely to start until at least mid-2017.

Once the ETS proposal is made law, the Fund’s committee will draw up procedures for member states to select projects.

By Ben Garside – ben@carbon-pulse.com