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European Council adopts position on the Market Stability Reserve for the EU ETS ahead of negotiation

Following the endorsement of the market stability reserve (MSR) reform for the EU Emissions Trading System (ETS) by the Environment, Public Health and Food Safety (ENVI) Committee of the European Parliament on 24 February 2015, the European Council has adopted its own position on the subject on 25 March.

As mentioned in the last edition of this Report [1], the ENVI-Committee supported an early start of the MSR at the end of 2018 (contrary to 1 January 2021 in the European Commission proposal). It also called for an automatic inclusion of the 900 million EUAs back loaded over the 2014-2016-period into the MSR from 2019 onwards.

While the European Council also supports the implementation of the MSR, it sides with the European Commission with regard to the start date (2021). More surprisingly, the Council agrees to the automatic inclusion of the 900 million back-loaded EUAs into the MSR.

All parties have remained largely silent about the last controversial topic, the fate of unallocated allowances. Those unallocated allowances, currently are set aside for new entrants, or are set aside following from plants’ closure pose another threat of oversupply to the EU ETS. All parties, including the Council in its 25 March agreement, have avoided the problem and postponed the discussion to the review of the EU ETS Directive, currently on its way.

A first trilogue meeting on the reform between the Council, the Parliament and the Commission took place on 30 March.

The MSR-reform aims to create a reserve where carbon emission allowances (EUAs) would be set aside from the market in case of EUA-oversupply, and fuelled back into the system when EUAs are scarce. This automatic mechanism is meant to the “key” to reinvigorating the EU ETS before a full-fledged reform enters into force.

Energy intensive industrials and Member States with high carbon footprint (such as Poland) have been resisting reforms to the EU-ETS fearing a carbon price rise and rising power prices as a consequence. Therefore, the Council’s support of the MSR, including the transfer of the back loaded EUAs into the reserve is as such good news, as an agreement on this subject was not a given. The fight will now focus on the starting date of the MSR. The Parliament’s push for an early start of the reform would grant more stability to the MSR at an earlier stage, and hence contribute more rapidly to rebuilding a strong carbon price signal. Perhaps the perspective of the UNFCCC COP21 conference planned for the end of the year will help Member States supporting a strong EU ETS to convince Member States opposing the reform. Part of the challenge at COP21 will indeed be to convince the international community that cap and trade schemes can deliver, and the MSR will need to form part of this demonstration.

More information at:

[1] See February 2015 Correggio Report.

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