EU diplomats reached a provisional agreement on Tuesday for the MSR, paving the way for the measure to be passed into law.
After two-and-a-half hours of closed-door trilogue talks in Brussels, negotiators from the EU Council, Parliament and European Commission reached agreement on the wording of the bill.
“It’s a very good deal, a substantial improvement to the Commission’s proposal,” German MEP and one of parliament’s lead negotiators Matthias Groote told Carbon Pulse.
The deal strengthens the Commission’s original MSR bill by moving forward the start date to Jan. 2019 from 2021, and fills the reserve with hundreds of millions of backloaded and unallocated allowances.
**Click here for an rundown of how the MSR will work**
The Council and Parliament had already aligned their views on those amendments, but entering negotiations still had differences about the earmarking of allowances due to enter the reserve.
“It’s a decent outcome and the parliament can celebrate this agreement,” said MEP Bas Eickhout, who led the Greens in the talks.
The deal would create a stronger MSR than many market watchers had been predicting a few weeks ago.
Even with weaker provisions, the MSR would still help push EU carbon prices up at an average annual rate of 15% to 2020, according to a Carbon Pulse poll of 10 analysts on April 15.
“The MSR deal is the best outcome it was possible to hope for. All changes to the initial Commission proposal are towards a more stringent mechanism,” said Stig Schjolset, an analyst at Thomson Reuters Point Carbon.
According to sources, the deal will see 8% of the allowances in circulation – as set out in the Commission’s most recent over-supply calculations – initially injected into the MSR between the start of January and the end of August in 2019, or 1% for every month. That figure then rises to 12%, and those excess EUAs are placed in the reserve at the same monthly rate over a 12-month period starting every September from 2019.
UNALLOCATED AND SOLIDARITY
The trilogue deal watered down a Council provision regarding the bloc’s solidarity fund which had proposed that allowances earmarked for sale by poorer member states be prevented from entering the MSR over 2021-2030.
This will only apply until the end of 2025 under today’s deal, according to two sources that participated in the trilogue talks.
The Parliament also effectively lost its demand to sell 300 million of the allowances that go unallocated by 2020 to raise cash for a fund to help industry innovate.
Today’s deal merely invites the Commission, as part of its upcoming ETS Directive review, to consider if up to 50 million of these EUAs should be used for such a fund.
“That review should also consider whether up to 50 million allowances should be used to supplement existing resources to promote projects to Article 10(a)(8) and low-carbon industrial innovation projects, with projects in all member states including small-scale projects, before 2021,” the agreement said, according to text seen by Carbon Pulse.
OPPOSITION?
The text agreed in the trilogue must still be formally endorsed by member states and the EU Parliament.
The full EU Parliament has already set an indicative voting date for the MSR on July 6, according to the assembly’s procedure file, while the Council must also sign off on the deal at a future Coreper meeting and then by ministers.
However, one lawmaker flagged a potential obstacle to a final agreement:
“The (eastern) countries will feel somewhat aggrieved at the provisional deal given both the changes to the solidarity fund and the start date, and may therefore try to reprise the blocking minority in Council,” Scottish Conservative MEP Ian Duncan told Carbon Pulse.
Voicing his displeasure using a football reference, Polish climate envoy Marcin Korolec panned the deal on Twitter:
Champions League latest: Predictability & Market vs. Blind Artificial Push for High CO2 Price 0:2
— Marcin Korolec (@MarcinKorolec) May 5, 2015
Poland led a blocking minority of mainly eastern European states that had opposed an earlier start to the MSR but was broken after the Czech Republic and Lithuania defected to the western camp.
Analysts at Energy Aspects said while it is unusual for a bill to face opposition post-trilogue, it’s not impossible.
“(It) would require a process of second readings (and would mean) considerable delays to adoption. Given the start date of the MSR is still likely to be some time away, a delay would not be problematic for the legislation – although it is unexpected,” they wrote in a note earlier on Tuesday.
Europe’s climate and energy commissioner Miguel Arias Canete praised the deal, adding “now all our efforts in getting post-2020 ETS reform before the summer break”. He was referring to the Commission’s upcoming ETS Directive review, which aims to redraft laws governing the scheme’s fourth phase (2021-2030).
By Ben Garside and Michael Szabo – ben@carbon-pulse.com
