The EU ETS emissions cap could be reduced by as much as 304 million tonnes in 2021 if some richer member states opt to take advantage of a provision to help them meet climate goals in other non-ETS sectors, according to a report released on Thursday.

The provision could impose additional cuts to the massive 2-billion unit oversupply in the bloc’s carbon market beyond those to be brought in by the MSR, which is estimated to erode the current surplus by some 1.6 billion EUAs by 2020 and which analysts think will triple carbon prices from current levels.

According to the report by the Oeko-Institut, the measure would form part of the EU’s Effort Sharing proposal due to be published by the European Commission early next year on how to cut emissions over 2020-2030 in sectors not currently regulated under the EU ETS.

As part of 2030 climate goals EU leaders agreed last year, non-ETS sectors must cut emissions by 30% under 2005 levels, and flexibility mechanisms to help meet that goal will be “significantly enhanced”.

One such flexibility mechanism is an option for governments to use a provision for a “limited, one-off reduction” in EUAs to offset against the burdens placed on non-ETS sectors. The Commission will define what “limited” could mean in its legislative proposal.

The Oeko study, commissioned by Carbon Market Watch, found that 6-12 member states could take advantage of it, based on the yet-to-be-finalised guidance laid down by EU leaders that it be for states with higher-than-average Effort Sharing goals and higher costs in reducing those emissions.

Austria, Denmark, Finland, Malta, Netherlands and Sweden can opt to do it if the Commission uses a narrow interpretation of the guidance, the report said. A wider interpretation would also bring in Belgium, France, Ireland, Italy, Luxembourg and the UK.

Assuming “limited” means each nation could use it to increase their 2021 Effort Sharing goal by up to 20%, this could reduce the EU ETS cap by up to 269 million or 304 million EUAs for the narrow and wider interpretations respectively, the study found.

Stig Schjolset, an analyst at Thomson Reuters Point Carbon, said the maximum ETS cap reduction might only be around 160 million, or 1% of the ETS Phase 4 cap, to be viewed as having a sufficiently “limited” market impact by the Commission.

“COUNTER-PRODUCTIVE”

Despite the cap reduction, the Oeko report said use of the provision would be counter-productive from an environmental perspective because it alone would not do enough to push carbon prices higher in the EU ETS while letting non-ETS sectors off the hook.

“The result could mean postponed action in these sectors and overall higher emission levels in the EU until 2030 and beyond,” it said.

The reduction effort in the non-ETS sectors would decrease by up to 15% over 2021-2030 and undermine the EU’s overall 40% emission reduction target to result in actual cuts of 35%, Oeko said.

“Loopholes disguised as flexibilities could almost wipe out the EU’s 2030 climate target for these important non-ETS sectors,” said Femke de Jong of Carbon Market Watch.

FLEX MECHS

The current so-called “Effort Sharing” rules to 2020 allow governments to help meet their targets ‘flexibly’ by buying UN-backed Kyoto Protocol carbon credits or investing in emission reduction initiatives in other member states.

While many nations have bought Kyoto units, no other intra-government trades have occurred so far as most nations are comfortably on track to meeting their goals.

After 2020, governments won’t be allowed to use Kyoto credits to help reach these targets, restricting any carbon unit trade to within EU borders while opening the door to new intra-EU ‘flexibilities’.

TIMELINE

The Commission will publish the Effort Sharing proposal in the first half of next year, the EU’s climate chief Miguel Arias Canete said on Thursday. Some observers had expected the bill to come later this year.

Effort Sharing covers around half of the EU’s greenhouse gas output from sectors such as agriculture, buildings and transport by allocating member states differing reduction goals based on their GDP.

“In the first half of next year … the Commission will also present a Communication on Decarbonisation of Transport, which will set out our strategy to reduce greenhouse gas emissions in transport. This will be followed later on by specific legislation,” said Arias Canete in a speech at a Brussels conference.

“To achieve our overall target, all sectors need to contribute… Our first challenge will be to carefully determine, in the context of the Effort Sharing Decision, the scale of contribution of transport and the overall cost vis-à-vis other non-ETS sectors (agriculture/building).”

LAND USE

The Commission is also planning to publish in the first half of 2016 a separate legislative proposal on how to tackle the bloc’s post-2020 land use (LULUCF) emissions, currently outside of both the EU ETS and Effort Sharing.

As part of a consultation that closed on Wednesday, the Commission is considering whether to keep the current separation of LULUCF or include it in Effort Sharing. A third option is to keep a separate LULUCF pillar but to include non-CO2 emissions from agriculture (methane and N20) to effectively regulate all agriculture GHG emissions together.

A seperate study by the Oeko-Institut commissioned by environmental campaigners Fern found that if LULUCF is integrated in Effort Sharing, this too could undermine the EU’s overall 40% emission reduction target and result in actual cuts of 35%.

By allowing member states to count land use in their Effort Sharing goals, it would reduce the emission reduction effort required in other non-ETS sectors by up to 65%, diluting the -30% target into a -16% goal.

Taking steps to absorb more CO2 via measures such as planting more trees or restoring degraded areas is generally cheaper than making carbon-cutting investments in agriculture, buildings and transport, making it a tempting option for member states, particularly those with large farming sectors such as Ireland and France.

Yet green groups argue that such temporary measures are difficult to measure accurately and shouldn’t replace permanent cuts made by making investments in cutting emissions from burning fossil fuels.

Instead, they want a separate LULUCF pillar to ensure all sectors are limiting their carbon footprints.

“A LULUCF pillar would mean the EU could strive for the best in the land sector, incentivising ecosystem restoration, forest conservation and agro-ecology, while maintaining pressure on the energy, transport, waste, agriculture and other industrial sectors,” said Fern’s Hannah Mowat.

Fern is against including the non-CO2 agriculture emissions in the LULUCF pillar as the complexity involved in the shift would risk skewing incentives in all areas.

EU TIMELINES

Arias Canete said earlier this week that the Commission is aiming to publish its post-2020 EU ETS reform proposal in mid-July despite earlier warnings it could be delayed until September.

Today, he said that before the Commission’s August summer break he will present a package of measures including a consultative communication on electricity market design and a new energy deal for consumers, to be followed by legislation in 2016.

By Ben Garside – ben@carbon-pulse.com