The European Union’s post-2020 reserve for new entrants to the carbon market is set to shrink under a plan the bloc’s regulator is considering, according to Bloomberg New Energy Finance.
The European Commission, the EU’s regulatory arm, wants to earmark for new emitters and potential increases in production some carbon allowances not used in 2013-2020 and 250 million permits from a planned market-stability reserve, according to draft legislation. The measure would translate into law a climate deal reached last year, when the 28-nation bloc’s leaders endorsed a faster pace of pollution cuts in the next decade.
The volume for new entrants will amount to around 400 million tons in the new trading phase of the EU carbon market, BNEF analysts said. That’s less than the around 772 million tons that would be placed under the NER reserve under the current rules, which earmark about 5 percent of total permits for new installations.
“The change to the NER releases 370 million allowances to the market that would otherwise have been unused until the end of the next trading period in 2030,” said James Cooper, a London-based analyst at BNEF. “Any potential bearish effect of this is likely to be muted by the impact of the planned market stability reserve, which will ultimately absorb this additional volume.”
The EU’s regulatory arm aims to publish the planned review of the EU emission-trading system on July 15. The document may still be subject to changes before publication. The commission has a policy of not commenting on drafts.
“Our base-case forecasts assume that little if any NER will be used over Phase 4” of the EU carbon market through 2030, Cooper said.
The draft earmarks for production increases and new entrants a pool of allowances not allocated through 2020 to emitters outside of a special carbon leakage list. The list includes businesses prone to relocation to regions without carbon curbs. BNEF puts the volume of unallocated permits to be set aside after 2020 for new companies in the EU emissions-trading system at 145 million tons.
The new entrant reserve will also be boosted by 250 million permits taken from the planned market-stability reserve, which is to be established by a separate law this year and is designed to automatically take in allowances starting in 2019 to curb oversupply.
The stability reserve, known as MSR, will automatically absorb permits if the surplus exceeds a fixed limit, and release them to the market in the event of a shortage. That would ease an excess of permits that led to a 60 percent drop in the price of emissions in the past five years.
Under a deal reached earlier this year by EU lawmakers, the MSR will also in 2020 take in allowances not used because of plant closures as well as those not allocated to new installations in 2013-2020. Without this provision they would be auctioned, adding to oversupply.