ETS market stability reserve: a small step forward…

Last Thursday during the Business & Climate Summit held in UNESCO, enterprises gathered to recall, among others, the importance of a strong carbon price. But on the European side, the reform is far from being achieved. After tough negotiations, the European Council, European Parliament and European Commission finally agreed on a first step to strengthen the ETS market, through the implementation of a market stability reserve (MSR). This agreement was long expected by industrials of the sector, but remains nevertheless quite disappointing. Indeed, it leaves behind several ambitious parameters, essential to the full success of this reform, and providing an ambiguous signal only few months ahead of COP21…

The objective of this Market Stability Reserve is to tackle gradually the surplus of allowances on the ETS market, one of the main triggers of the fall of the CO2 price. Operational from the 1st of January 2019, it should therefore withdraw 12% of the allowances in circulation each year. The “backloaded” allowances will also be replaced into the MSR, a measure that was strongly advocated by UFE. Finally, the text also provides that quotas not allowed at the end of the 3rd trading period would be placed into the reserve, by 2020.

Too early to claim victory…

But to obtain this compromise, the European institutions had to make some concessions, and not the least… In the first place, no less than 10% of the total volume of allowances shouldn’t be covered by the mechanism: allowances for countries with a GDP under 60% of the EU average in 2013, will be indeed excluded of the withdrawal process. If it keeps down the cost of energy transition for those Member States, it could also slacken further investments in low carbon technologies, yet urgent to trigger.

The compromise also leaves aside the creation of a dedicated fund for innovation, which could have been fueled with some allowances from the reserve. However, one of the main challenges of energy transition is a technological one! Today, private financings are still too rare, and many promising technologies (storage, CCS) struggle to get through the demonstration stage. To complete the picture, governments also refused an amendment asking for 50% of the allowance’s revenues to be mobilized for the financing of clean technologies, and modernization of the most polluting industrial installations.

… Not too late to keep fighting!

The fight is far from being over. Two big battles are indeed awaiting the carbon market: In the first place, a legislative proposal for a deep reform of the ETS market should be provided this summer… Some rumors say nothing could come out before the end of the year to avoid any tension for COP21! If it was to be the case, it wouldn’t be good news for this market that urgently needs to be strengthened. On the other hand, it is essential to rethink the contribution of non-ETS sectors (55% of CO2 emissions!), through a revision of the Effort Sharing Decision (ESD). This regulation sets indeed CO2 emission reduction objectives for sectors including road transport, heating and cooling, buildings, small industries etc… In France, transport (and notably road transport) is one of the most emitting sector, with no less than 38 MtCO2 per year, 38% of national emissions… It is therefore crucial to establish a fair contribution of those sectors to the fight against climate change… Should we set sectorial objectives for CO2 emissions reduction? Should we integrate some of those sectors to the ETS market? Solutions are many, and must be at the core of a fair debate between European institutions and Members States (a public consultation should be launched by the European Commission in the second half of 2015). But what is at stake shouldn’t be minimized: if the European Union is willing to lead the way on the fight against climate change, it must also show some courage, and give itself the means to fulfill its ambitions!