Thursday

22nd Feb 2024

Opinion

Reform of EU emissions trading system likely to fail

  • The Committee of the Permanent Representatives of the Governments (Coreper) will make its decision this week, on Wednesday (25 March). (Photo: Kelvin255)

The EU has declared the Emissions Trading System (ETS) to be its key tool for cutting industrial emissions. However, the price for CO2 allowances has been dropping for years, reaching a low point of 3€/tonne in 2013. As a result, the EU now seeks to “fix” the current ETS – albeit by neglecting its own legal principles.

The ETS works on the “cap and trade” principle, a market-based system that deliberately avoids the use of price regulation. A cap is set on the total amount of certain greenhouse gases that can be emitted by factories, power plants and other installations falling within the system. The cap is then reduced over time, so that total emissions fall.

Read and decide

Join EUobserver today

Get the EU news that really matters

Instant access to all articles — and 20 years of archives. 14-day free trial.

... or subscribe as a group

Companies receive or buy emissions allowances, to cover their actual emissions (where such emissions exceed their designated cap).

Originally, the EU used a price of 30€/tonne for its calculations. However, due in particular to a significant surplus of allowances, the price still fluctuates above and below this figure by around 7€/tonne. Critics therefore say that the ETS has failed its mission, but the EU is forced to stick with it, having no other system to turn to.

Market stability reserve

The European Commission has thus proposed an instrument, which will stabilise the price of the C02 tonne, the so-called “market stability reserve”.

From 2021 onwards, a certain number of emissions allowances for auctioning shall be taken from the market in order to reduce the number of allowances in circulation.

Now, the environmental committee of the European Parliament has not only announced its support for the market stability reserve, but also proposed two relevant amendments.

First, the committee favours implementation by the end of 2018, rather than 2021. Second, it wishes to transfer certain allowances, which have already been set-aside (“back-loaded”) and should be released to the market in 2019/2020, directly to the market stability reserve.

EU law and principles

Whilst the committee doubtless made such proposals with good intentions, the transfer of the “back-loaded” allowances to the market stability reserve before the end of the ongoing trading period (end of 2020) would conflict with EU law and principles.

First, if the already “back-loaded” allowances are not released to the market in the ongoing trading period, this is likely to conflict with the principle of legal certainty. Market participants will have developed legitimate expectations regarding their release in the last two years of the ongoing period.

Second, and of greater legal concern, is that the approach will also result in decreasing the ETS cap of the ongoing trading period and therefore increase the 20 percent CO2 emissions reduction target by 2020 – agreed by the European Council back in 2007.

The quantity of the “back-loaded” allowances equates to six per cent of the total allowances under the cap in the period 2013 to 2020. Therefore, the EU would be changing the reduction target through the backdoor, without any underlying political decision by the heads of the member states (European Council).

Third, the approach conflicts with the principle of proportionality. It is neither proven that the market stability reserve will actually eliminate the surplus and that the price will rise, nor does the assessment include potentially "less restrictive means", which might be sufficient to achieve the EU’s target of greater climate protection.

Member States' competencies

Likewise, there are significant concerns that the commission seeks to encroach on member states’ competencies.

As laid down in primary law, a special legislative procedure requiring unanimity in the Council must be used to pass EU measures that will affect member states’ energy mixes. However, the commission’s proposals ignore this requirement, as they suggest the use of the ordinary procedure whereby the Council can act by simple majority.

The committee of the permanent representatives of the governments (Coreper) will make its decision this week, on Wednesday (25 March). The Council, parliament and commission will then meet to develop a final text.

Hopefully, the EU institutions will heed these legal concerns before they vote for an instrument that clearly conflicts with established EU principles.

If not, the measure could be subject to legal action – in particular by member states, whose energy mixes or domestic industries would heavily be affected by the market stability reserve.

Rather than fixing the ETS, the proposed reform of the ETS may instead turn into a headache for the EU.

Wolf Friedrich Spieth is partner and co-head of the low carbon energy group at Freshfields Bruckhaus Deringer in Berlin

Disclaimer

The views expressed in this opinion piece are the author's, not those of EUobserver.

Blackmailing the Global South on EU carbon border tax won't work

According to the European Commission, CBAM is supposed to prevent "carbon leakage". In other words, it seeks to prevent European industries relocating to jurisdictions with less stringent environmental policies, while also incentivising carbon pricing and industrial decarbonisation abroad.

Ukraine refugees want to return home — but how?

Fewer than one-in-ten Ukrainian refugees intend to settle permanently outside Ukraine, according to new research by the associate director of research and the director of gender and economic inclusion at the European Bank of Reconstruction and Development.

EU-Israel trade agreement must be on table to stop Rafah attack

The EU-Israel association trade agreement enabled €46.8bn of trade last year. Exports rose for both parties by around 20 percent in 2022. As the bloc's foreign affairs chief Josep Borrell said: "Yes, we have the capacity to influence [Israel]."

Ukraine refugees want to return home — but how?

Fewer than one-in-ten Ukrainian refugees intend to settle permanently outside Ukraine, according to new research by the associate director of research and the director of gender and economic inclusion at the European Bank of Reconstruction and Development.

Latest News

  1. How Amazon lobbyists could be banned from EU Parliament
  2. Blackmailing the Global South on EU carbon border tax won't work
  3. EU auditors: rule-of-law budget protections only partial success
  4. EU's €723bn Covid recovery fund saw growth, but doubts remain
  5. Von der Leyen rejects extremist parties, leaves door open to ECR
  6. Russian oligarchs failed to get off EU blacklist
  7. Podcast: Navalny, Ian Bremmer and "more Europe"
  8. Only Palestinians paying thousands of dollars leave Gaza

Stakeholders' Highlights

  1. Nordic Council of MinistersJoin the Nordic Food Systems Takeover at COP28
  2. Nordic Council of MinistersHow women and men are affected differently by climate policy
  3. Nordic Council of MinistersArtist Jessie Kleemann at Nordic pavilion during UN climate summit COP28
  4. Nordic Council of MinistersCOP28: Gathering Nordic and global experts to put food and health on the agenda
  5. Friedrich Naumann FoundationPoems of Liberty – Call for Submission “Human Rights in Inhume War”: 250€ honorary fee for selected poems
  6. World BankWorld Bank report: How to create a future where the rewards of technology benefit all levels of society?

Stakeholders' Highlights

  1. Georgia Ministry of Foreign AffairsThis autumn Europalia arts festival is all about GEORGIA!
  2. UNOPSFostering health system resilience in fragile and conflict-affected countries
  3. European Citizen's InitiativeThe European Commission launches the ‘ImagineEU’ competition for secondary school students in the EU.
  4. Nordic Council of MinistersThe Nordic Region is stepping up its efforts to reduce food waste
  5. UNOPSUNOPS begins works under EU-funded project to repair schools in Ukraine
  6. Georgia Ministry of Foreign AffairsGeorgia effectively prevents sanctions evasion against Russia – confirm EU, UK, USA

Join EUobserver

EU news that matters

Join us