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29th May 2022

EU market mechanism to boost carbon price

  • The steel industry is one of the sectors in Europe that falls under the emissions trading system. (Photo: Renate Meijer)

A market mechanism, which will regulate the number of available carbon credits, will start operating on 1 January 2019. Negotiators from the EU's governments and the European Parliament reached a deal on Tuesday (5 May) for the so-called market stability reserve.

The reserve is expected to boost the price of polluting by making the credits more rare.

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European companies from specific sectors – including power and heat generation, steel, cement, and ceramics – need to hand over permits to the EU commission for every emitted tonne of carbon dioxide each year on 30 April. They can buy and sell them on the market.

In recent years, a glut of allowances has amassed and the price of emitting one tonne of carbon dioxide has been under €8 – far too low to incentivise companies to switch to cleaner energy, experts say.

The EU commission proposed the market stability reserve in January 2014 as a first solution to save the fledgling emissions trading system, but there has been an intense debate over the starting date.

The commission suggested 2021, and coal-dependent Poland had led a blocking minority which had the power to stick to the original proposal.

Another group of countries, less reliant on coal, including Germany and the UK, had advocated 2017. The European Parliament too wanted an earlier date, but adopted a compromise date of 31 December 2018.

After the Czech Republic left the Polish-led blocking coalition, the negotiators were able to come to a typically European meet-me-in-the-middle compromise of 2019.

The EU commission had intervened in the market before.

In a short-term solution it set aside 900 million allowances, which had been meant to be auctioned between 2014 to 2016.

Because the credits cannot be cancelled, this batch of permits had been hanging over the market like a sword of Damocles.

The negotiators agreed Tuesday to directly put the permits in the reserve.

The deal reached on Tuesday still needs final approval from the member states and the plenary session of the European Parliament.

With the establishment of a market mechanism, the reform of the emissions trading system is not yet complete. The commission has said it will propose a complete reform of the system before the end of the year.

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