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Vote on Market Stability Reserve moves ETS reform a step closer

Proposals to reform the EU Emissions Trading Scheme (ETS) by introducing an early Market Stability Reserve (MSR) moved a step closer in February 2015, after EU parliamentarians approved a draft bill to introduce the MSR by 2018. The proposed law would establish a system that automatically takes a portion of ETS allowances off the market and into a reserve if the surplus exceeds a certain threshold. This will help to address an estimated 2 billion surplus of carbon allowances in the market.

The European Commission has proposed this automatic mechanism to avoid going through the procedure of a Directive amendment process each time an adjustment to the ETS is needed – as in 2013 with the so-called “back-loading” reform.

On February 24, lawmakers in the European Parliament backed the reform as it passed through the legislature’s Environment Committee (ENVI). MEPs proposed introducing the MSR by 2018 in order reduce the surplus of carbon credits. On the controversial question of the future of back-loaded EUAs, the ENVI calls for an automatic inclusion of the 900 million EUAs back-loaded over the 2014-16 period into the MSR from 2019 onwards.

Ivo Belet, rapporteur for the bill in the parliament, argued that the vote sent a signal that Parliament is serious about climate change and in addressing industry concerns. The positive outcome comes shortly after a draft opinion on the MSR had been narrowly rejected in a non-binding vote in the Parliament’s Industry, Research and Energy (ITRE) committee.[1] This push for a more ambitious reform would grant more stability to the reform at an earlier stage, and hence contribute more rapidly to rebuilding a strong carbon price signal. MEPs had initially been divided on the 2021 deadline for implementation set by the European Commission.

Industry stakeholders want the MSR to apply as soon as possible to remedy the current allowance supply influx which has resulted in a precipitous collapse in prices. EU carbon allowances are currently trading at around €7 per ton in 2015, compared with highs of around €30/t in 2008. A higher price for carbon could encourage fuel-switching from coal to gas in power generation. Under the draft bill, 12 percent of the surplus allowances would be taken out of the market and placed in a reserve each year.

The ENVI Committee Chairman has been given a mandate to start negotiations with Members States to reach a compromise in advance of the EU Parliament plenary vote later this year.

More information at:

[1] See Correggio Regulatory Report, January 2015.

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