Reform May Cut EU Carbon-Market Glut, Lead Lawmaker Duncan Says

  • Duncan eyes assessment of EU policies leading to supply cuts
  • Market stability reserve could absorb extra carbon permits

The European Union should further reduce supply of permits in its ailing emissions market, the world’s biggest cap-and-trade program, instead of mulling fixing prices, according to the European Parliament’s lead lawmaker on a carbon program reform.

Ian Duncan proposed measures aimed at limiting the amount of emission permits in circulation as a part of the EU Parliament’s legislative work on the post-2020 overhaul of the Emissions Trading System, or ETS. The provisions could encourage faster deployment of clean technologies by boosting the price of allowances, which slumped almost 80 percent in the past eight years amid oversupply, he said in a phone interview from Paris on Friday.

In the EU Parliament’s environment committee, Duncan leads the work of representatives of political groups, known as shadow rapporteurs, on a proposal by the European Commission to adjust the ETS to stricter pollution-reduction goals for 2030. The draft law isn’t ambitious enough to put Europe on track to meet the goal of the global climate agreement reached last year in Paris, where almost 200 countries agreed to work toward capping global temperature increases since pre-industrial times to 2 degrees Celsius (3.6 degrees Fahrenheit), Duncan said.

Allowance Glut

“What I’d like to get from my shadows and the groups is acceptance for a framework for additional measures to adjust the number allowances thereby adjusting the price, thereby driving innovation, and moving us toward the ambition of Paris,” said Duncan, who is a British member of the European Conservatives and Reformists in the EU Parliament, the third-largest political group.

To faster reduce the glut of carbon allowances, aggravated by an economic slowdown that cut industrial output, the EU should build on the Market Stability Reserve, a mechanism that would automatically control the supply of permits to pollute starting in 2019, Duncan said. The reserve, or MSR, was approved by the EU last year and will automatically absorb allowances in the cap-and-trade program if the surplus exceeds a fixed limit, and release them to the market in the event of a shortage.

Duncan proposed some "locks" to boost the EU ambition. He seeks to empower national governments to retire carbon allowances linked to closures of power plants. The amendments to the reform that he put forward also include an annual assessment by the commission of how overlapping EU policies on climate, energy efficiency and renewables undermine demand in the ETS.

Members of the EU Parliament’s environment committee may now propose their own ideas before the panel votes on its position. The final shape of the reform needs endorsement by the European Commission, qualified-majority support from national governments and majority backing from the European Parliament.

Carbon-Price Floor

“I’m expecting amendments to move several of the locks from the broader ‘shall’ category into the stronger ‘must’ category, which would send a stronger signal to the market,” Duncan said. “That’s the initial component part. What then does the commission do? What you end up doing, I’d hope, is put an amendment to the MSR so that it becomes a retirement home for allowances where they stay until they pass away.”

As a part of the post-2020 review, French Environment Minister Segolene Royal is pushing for a carbon-price floor, a proposal Duncan said is unlikely to win political backing in the EU. France says the EU should consider a minimum reserve price at government auctions of allowances.

“If you have a market price settled what happens is that if the other policies you have are successful, you drive down emissions, you drive down demand, there’s now an excess of allowances once again on the market and the price will end up continuing to be artificially supported,” Duncan said. “The floor will become the ceiling. That’s not a market anymore.”

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