Sweden Floats Options to Strengthen EU’s Ailing Carbon Market

  • Climate Minister Loevin says EU could bolster market reserve
  • EU needs to curb surplus of permits, Loevin says in interview

The European Union debate on a post-2020 overhaul of the bloc’s carbon market is set to intensify after Sweden outlined options to boost the cap-and-trade system tainted by a persistent oversupply of permits.

Isabella Loevin, Swedish minister for international development cooperation and climate, said she presented a discussion paper on the Emissions Trading System on Thursday to a group of environment ministers from 14 EU countries supporting ambitious climate policies, including Germany, France and the U.K. They met before a quarterly gathering of EU environment ministers in Luxembourg.

The document doesn’t constitute a Swedish government stance but rather aims to facilitate political talks on a law drafted by the European Commission to reform the ETS after 2020. It flagged tools including strengthening a reserve of permits that are temporarily withdrawn from the market, a possibility to cancel some allowances or extending the so-called backloading regulation that delays auctions of carbon permits through 2016.

‘Starting Point’

“Our starting point is that we need to strengthen the price signal of the ETS because it’s not working the way it was meant to from the start,” Loevin said in a phone interview from Luxembourg. “We’re seeing an enormous amount of excess emission allowances, about 2 billion right now. The commission proposal on the reform of the ETS is not enough to address the real problem.”

The 11-year-old cap-and-trade program, Europe’s flagship climate policy tool, imposes pollution limits on more than 11,000 facilities owned by utilities and manufacturers. A record glut of permits, aggravated by the economic crisis, pushed carbon prices in the ETS down about 80 percent over the past six years. Allowances for delivery in December advanced following Loevin’s comments and traded 1.7 percent up at 5.91 euros a metric ton as of 4:41 p.m. in London.

To help prices rebound, EU lawmakers agreed last year to introduce the Market Stability Reserve, a mechanism that would automatically control the supply of permits to pollute starting in 2019. The reserve would follow an earlier emergency measure, known as backloading, under which sales of 900 million carbon permits would be delayed at auctions in 2014-2016.

One option for the EU would be to strengthen the MSR, Loevin said.

“Another one is to have a rule so that after a certain period of time, maybe five years, excess allowances would be scrapped,” she said. “We feel also the backloading could continue up until 2019.”

Under the proposed reform of the carbon market, the emission caps will be reduced annually by 2.2 percent starting in 2021, compared with 1.74 percent in the current trading period through 2020.

‘Not Enough’

The so-called linear reduction factor is not enough, according to Loevin, who said the EU should continue lead the global fight against climate change after nations across the globe reached a deal in Paris last year to cub pollution. Under the accord countries from the U.S. to China agreed to work toward capping global temperature increases since pre-industrial times to 2 degrees Celsius (3.6 degrees Fahrenheit)

“It’d be extremely difficult, not to say impossible, to change it at this moment, but what we’re very anxious to see is that if we’re going to live up to the Paris Agreement and if we’re going to stay below 2 degrees, and preferably not over 1.5 degrees, then we need to raise the ambition substantially,” she said. “The stock-taking in 2018 is the first occasion to see how much we’re lagging behind and how much the world is lagging behind.”

Buying, Canceling

Loevin also stressed Sweden is committed to the program of buying and canceling allowances worth 30 million euro annually starting in 2018. At current price levels, that corresponds to around 10 percent of the nation’s total emissions. The Scandinavian country is talking to other EU member sates if they are interested in joining the program of having a similar one, according to the minister.

“It’s certainly something that some member states are listening to with interest,” she said. “The point is more of proving that Sweden is putting its money where its mouth is and we’re really showing that we mean business. We want a reduction in emissions because we also need to incentivize low-carbon technologies. With too low a price on emissions it’s not consistent with the polluter-pays principle and we don’t have the right instrument in place to make the transition.”

Loevin said she was “mildly optimistic” that the EU will strengthen its carbon market.

“This morning discussion was one of those very important elements that we need in order to see how we can proceed,” she said. “There’s quite strong support, certainly in the Green Growth Group, but I’ve also talked to some countries outside the group and they are also concerned and want to see a functioning ETS.”

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