EU Lawmakers to Weigh Option of Faster Carbon Cuts After 2020

  • EU Parliament lead lawmaker floats options on carbon reform
  • Options to be considered by political groups in EU Parliament

The European Parliament may push to accelerate carbon reductions in the European Union emissions market over the next decade, under an option outlined by Ian Duncan, the lead lawmaker on a reform of the world’s biggest cap-and-trade program.

Representatives of political groups in the EU Parliament’s environment committee will weigh an option to propose increasing the pace of greenhouse-gas cuts to 2.4 percent or 2.6 percent a year after 2020, according to a document presented by Duncan on Tuesday. That compares with 2.2 percent put forward by the European Commission, the bloc’s regulatory arm, following endorsement by EU heads of governments.

An increase of the so-called linear reduction factor to 2.4 percent would “bring us in line with the lower end of our 2050 decarbonization target” of between 80 and 95 percent, Duncan said in an option paper presented to representatives of political groups, also known as shadow rapporteurs. Elevating the factor further to 2.6 percent would bring the EU in line with the upper end of the political target for mid-century, he said.

Surging Prices

Carbon prices jumped 7.1 percent on the options paper, extending their daily surge to 12.7 percent, the biggest since May 2013. The benchmark contract for December, boosted earlier Tuesday by French President Francois Hollande’s carbon-price-floor plan, closed at a three-month high of 6.65 euros per metric ton on the ICE Futures Europe exchange in London.

“The most important item, and positive for the price of EU allowances, is in my reading the potential increase of the linear reduction factor,” said Bernadett Papp, an analyst at Vertis Environmental Finance Ltd. in Budapest. “The big question is, however, if members of the European Parliament in the plenary and the European Commission would accept it as well.”

The options paper aims to “ascertain the preferences of shadow rapporteurs and political groups on the critical design structure of the reform.” They have until May 6 to respond, indicating preferences based on the balance of opinion in their political groups.

Greenhouse Gases

The EU emissions trading system is Europe’s flagship policy tool to reduce greenhouse gases blamed for climate change. It imposes decreasing pollution caps on about 12,000 installations owned by manufacturers and utilities. The carbon price slumped by more than 70 percent in the past eight years as an economic crisis cut industrial output and inflated a glut of allowances.

The European Parliament and its 28 member states started legislative work last year on a draft law to adjust the EU ETS to a tougher emission-reduction target for 2030. To enter into force, it needs majority backing by the assembly and qualified majority support from national governments.

Duncan, a British member of the European Parliament from the Conservative group, is tasked with drafting a report in the environment committee, which leads legislative work on the EU ETS reform in the assembly. After a vote on the report in the committee his responsibilities will also include representing the Parliament in negotiations with member states and steering the reform through a plenary vote.

‘Heavy Resistance’

Accelerating carbon reductions could technically go against the mandate by EU leaders, who decided in 2014 that emissions in the ETS should fall by 43 percent compared with 2005 levels by 2030, said Jahn Olsen, analyst at Bloomberg New Energy Finance in London. Still, there could be some flexibility as the EU-wide headline target for 2030, which includes sectors outside the carbon market, was defined as “at least 40 percent,” according to him.

“Regardless, if proposed, it would spark a lot of debate and meet heavy resistance from the usual suspects,” Olsen said.

Other options proposed by Duncan include changing the share of allowances to be auctioned from the 57 percent proposed by the commission to 52 percent. That would reflect the total number of permits originally earmarked to be given for free at the beginning of the 2013-2020 trading period, according to the paper.

Shadow rapporteurs will also consider options of tiered allocation of free permits and modified provisions on a 400-million permit reserve for new entrants to the EU ETS. The reserve could be accepted as proposed by the commission, with 250 million allowances taken from the Market Stability Reserve, or changed to take 250 million from the auction share instead.

The document also includes a possibility to change the provisions on a fund for innovation, which under the commission’s proposal is to include 400 million permits from the free allowances pot and 50 million from the Market Stability Reserve. An option outlined by Duncan is to split the 400 million allowances between the free permits pot and the auction share.

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