Richer EU governments gave up some €845 million in carbon revenues to poorer states to clinch a deal for an earlier start to EU ETS reforms, analyst calculations revealed on Thursday.

Wealthier EU nations including Germany and the UK were pushing to strengthen the MSR by starting it several years before the 2021 date proposed by the European Commission, but a blocking minority of eight poorer, mainly eastern European governments refused to budge until a compromise emerged.

The countries initially reached an agreement calling for a so-called solidarity fund of billions of allowances – meant for sale by poorer EU states – be untouched by the reserve between 2021 and 2030.

A provisional deal struck between nations, the European Parliament and the Commission on Tuesday limited the fund’s MSR immunity until the end of 2025, but still means poorer states stand to earn €845 million in auction revenue they wouldn’t have gotten without the concession, according to Thomson Reuters Point Carbon.

This is because the balance of auctionable allowances to be withheld from sale in the MSR will have to be drawn from the allocations of richer governments, cutting into their sale revenues over 2021-2025.

UPFRONT BENEFIT

Some 15 member states across the east and much of the south of the EU will likely have a share of allowances in the solidarity fund.  They are: Bulgaria, Cyprus, Czech Republic, Estonia, Greece, Croatia, Hungary, Lithuania, Latvia, Malta, Poland, Portugal, Romania, Slovenia and Slovakia.

The Czech Republic and Lithuania, the two nations that eventually defected from the blocking minority and relented on the MSR’s start date, could earn an extra €79 million and €25 million respectively, Point Carbon estimates show.

Poland, which led efforts to hold out against strengthening the MSR, could earn an extra €202 million out of a total €16 billion because of the compromise to ringfence the solidarity fund allowances.

The additional sum is relatively small, as Point Carbon analysts expect all governments to benefit from an overall increase in revenues from auctioning allowances, as the supply-curbing MSR pushes up EUA prices.

They predict auction revenues to total €151 billion euros for the 28 EU nations over 2015-2025, up from €110 billion under the weaker, original MSR text that called for a 2021 start, and 89% higher than the €80 billion estimated with no MSR in place.

Top emitters Germany and the UK stand to earn the most from auctioning with projected revenues of €32 billion and €17 billion respectively.

The windfall for poorer nations is seen as being only temporary, as the richer governments will benefit more when the MSR is forecast to start returning allowances to market after 2025, when the current oversupply dwindles and prices are expected to be much higher.

“The more allowances a country puts in the MSR, the more it benefits when it sells them back at higher prices. So the ringfencing is a classic example of giving up long-term benefits for short-term gain,” said Point Carbon’s Emil Dimantchev.

RICH-POOR TRANSFER

The ringfencing of solidarity fund cash is just the latest in a string of concessions richer EU nations have had to make towards poorer states to ensure the bloc speaks with one voice on climate change while softening the impact of higher energy bills.

The solidarity fund itself was agreed by EU leaders last October as part of the bloc’s 2030 climate and energy package, which also extended current provisions to allow some poorer nations to give away allowances to their power generators for free to help them innovate.

In return, western governments can benefit from “flexibility” provisions in sectors not regulated under the EU ETS, allowing them to invest and take credit for carbon-cutting projects in poorer nations, where emissions reductions theoretically can be made at much lower cost.

By Ben Garside – ben@carbon-pulse.com