EU Draft Deal Proposes Carbon-Market Fix by End of 2018

The European Union should start a mechanism to curb oversupply in the carbon market by the end of 2018, sooner than 2021 as proposed by the bloc’s regulator, under a compromise plan proposed today in the European Parliament.

Ivo Belet, who is steering the draft measure to introduce the emissions market stability reserve through the legislature, put forward a proposal aimed at building cross-party support before a Feb. 24 vote in the assembly’s environment committee.

His offer is an attempt to bridge differences between political groups on the design of the reserve, which would absorb carbon allowances if the surplus exceeds a fixed limit and release them to the market in the event of a shortage. The two largest groups in the parliament, the European People’s Party and the Socialists & Democrats, signaled support for it.

“A market stability reserve is established in 2018 and shall be operational by Dec. 31, 2018,” according to the draft compromise proposal obtained by Bloomberg News.

The plan, which was presented after negotiations among lead lawmakers from the parliament’s environment committee on Wednesday, is now subject to approval by political groups. They have until Tuesday to respond.

“It is a balanced agreement,” said Peter Liese, lead lawmaker on the file for the EPP, the biggest group in the EU parliament. ’’We will encourage investment in low-carbon economy because the ETS will work again. At the same time we took care that energy intensive industry is protected from carbon leakage.’’

Carbon Allowances

The 28-nation EU is seeking to strengthen its cap-and-trade emissions program after the price of permits plunged almost 70 percent since 2008 to levels that fail to deter industry from burning coal, the most-polluting fossil fuel. Carbon allowances for delivery in December rose as much as 2.5 percent to a three-week high of 7.49 euros a metric ton on ICE Futures Europe in London.

“A broad compromise is possible,” Matthias Groote, the German lawmaker representing Socialists in the negotiations, said in a phone interview on Wednesday. “We are ready to back 2018 as the starting date.”

The negotiations on Wednesday were very constructive, according to Gerben-Jan Gerbrandy, who represents the Liberals in negotiations on the market stability reserve, or MSR. An early start of the MSR, preferably in 2017, is crucial for his group, he said by e-mail after the talks ended.

Special Reserve

Under Belet’s proposal, carbon permits delayed at government auctions in 2014-16 would be placed directly in the reserve. Under the current law the 900 million backloaded permits will be sold at auctions in 2019-20, a scenario that groups including Socialists, Liberals and Greens have opposed.

Allowances remaining in a special reserve for new entrants at the end of the current trading period through 2020 and allowances not allocated to emitters due to closures or under exemptions should also be transferred to the reserve, according to the draft compromise.

The plan also includes a provision to make 300 million allowances available until the end of 2020 for an innovation fund. The fund will be based on backloaded and unallocated allowances and permits in the MSR, provided that their number in the reserve is higher than 400 million.

Belet proposed the thresholds for transferring permits into and from the reserve stay as proposed by the commission. That means the supply of permits would be reduced if an accumulated surplus were to reach at least 833 million tons. If the surplus were to fall below 400 million tons, the EU would begin returning allowances to the market from the reserve.

Time Lag

The time lag between calculating the number of permits in circulation and transferring allowances into or releasing them from the reserve would be shortened to one year from two years in the commission’s proposal.

The compromise drafted by Belet also includes a call on the commission to review provisions on carbon leakage, or relocation by businesses of production to regions without emission curbs.

The environment committee, which leads parliamentary work on the MSR, is scheduled to vote on the file during the afternoon session of its Feb. 24 meeting, which starts at 3 p.m. in Brussels, the agenda shows.

In the first step, lawmakers will cast ballots on compromise solutions, which -- if agreed -- will replace some amendments submitted earlier by individual members. A vote on other amendments proposed in the environment committee in December will follow. The final stage will be a decision on whether to approve an entire report on the file.

‘Big Chance’

A potential adoption of compromise amendments backed by most political groups would allow Belet to immediately request the committee’s mandate to start negotiations with EU governments on the fix’s final version. Their outcome will need approval by ministers from national governments and the whole Parliament for the MSR law to enter into force.

“We have a big chance to have broad support for a compromise with the mandate,” Groote said on Wednesday. “Everyone taking part in the talks showed responsibility.”

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