In their latest trilogue meeting, the European Commission, Council and Parliament were not able to reach an agreement on the reform for the EU Emissions Trading Scheme (ETS). While this news was disappointing, the lack of an agreement could also turn into an opportunity since it can still be discussed and strengthened.
The long and arduous debate among European institutions and EU stakeholders confirms the relevance of the ETS in EU policy. We see it as key to ensuring a sustainable future for Europe's economy while protecting its competitiveness and growth.
The debate has taken over two years and after exhausting negotiations, the European institutions have yet to reach an agreement. This is an alarm bell for industry and for the power sector in particular, a business that needs clarity in the legal and regulatory framework and a functioning carbon market to allow stable and long-term investments and operations.
I consider the EU ETS to be the only feasible instrument at the European level to foster a cost-effective reduction of greenhouse gas emissions, thereby supporting European countries in reaching Paris climate targets.
The ETS can and should be strengthened by doubling the Market Stability Reserve (MSR) intake rate to 24 percent, bringing forward by one year the cancellation of the future MSR surplus allowances and increasing the linear reduction rate.
These measures, if applied, would secure a robust system, provide the right supply and demand balance for allowances and a long-term price signal to both operators and investors.
The proposed introduction of alternative instruments, inconsistent with ETS design, partly explain why negotiations have been drawn out.
These instruments include a carbon tax, the Emission Performance Standard and other measures which though seemingly attractive, can only have a national perspective.
If applied, these measures would negatively affect a well-designed EU ETS and in practice would fail to have sufficient support across the EU member states.
These measures only serve to undermine ETS negotiations and would weaken the only EU market instrument whose strengthening could have positive effects in the short term.
The EU ETS is the most suitable system for developed and innovative economies like those of EU countries.
A cap-and-trade system such as the EU ETS is the most efficient mechanism to reduce emissions in the industrial sectors, especially in industrialised economies.
Indeed, by setting up a cap emission target, the effectiveness in achieving environmental objectives is guaranteed, while the price signal established by the market can ensure economic efficiency while minimising costs.
Other measures aimed at monetising emissions, such as the introduction of national carbon taxes for installations covered by ETS, are not as effective because they would introduce distortions to competition without lowering emissions.
A carbon tax is only a viable tool for areas not covered by the ETS such as agriculture, transport, residential and services. It is better suited to countries with a weaker institutional framework and sectors characterised by distributed emission sources.
However, to get a better picture of the current backdrop it is also worth having a look at the different approaches taken to mitigate climate change in the past.
The UN Framework Convention on Climate Change (UNFCCC – 1992) was a collective action undertaken by all UN Countries to mitigate climate change, and the Kyoto Protocol to the Convention (1997) established a top-down approach with quantified emission reduction or limitation commitments for Developed Countries and Economies in Transition.
The EU ETS was adopted in 2003 to fulfil the reduction commitments made by the EU under the Kyoto Protocol.
The Paris Agreement, signed in 2015, emerged from a different balance among world economies, with major emitters, that this time also include both developed and developing countries, taking an obligation to reduce their greenhouse gas emissions.
In this transition to a zero-emission economy under the guidance of the bottom-up approach of the Paris Agreement, the ETS remains a key instrument to limiting emissions in a cost-effective manner. It provides certainty in the emission reduction outcome and thus facilitates international cooperation and investment.
The EU has the unique experience of running and optimising the biggest cap-and trade system in the world and should maintain its global leadership by giving a clear political message and approving a strengthened EU ETS which is key to enhancing the EU's climate, energy and industrial strategy.
Simone Mori is the Head of European Affairs at Enel.
Simone Mori is the Head of European Affairs at Enel.