A New Market Stability Reserve for the European Carbon Market   

On September 18, 2015, the European Council adopted a decision related to the creation of a market stability reserve ("MSR") for the European greenhouse gas emission trading system ("EU ETS"). This decision was initially proposed by the European Commission in January 2014 and approved by the European Parliament in July 2015.

The EU ETS was established by Directive 2003/87/EC of October 13, 2003 and launched in 2005. Based on this scheme, an EU-wide cap is fixed for the total emissions produced by European industries covered by the scheme. 

Concerned industrials are required to obtain emission allowances necessary to cover emissions from their activities, either for free or through an auctioning system, and can trade allowances on the market. The European strategy on greenhouse gas emissions was recently revised in October 2014 and set a new target for 2030 of lowering greenhouse gas emissions by 40 percent compared to 1990.

The post-2008 economic crisis led to a decrease in the need for emission allowances, and a large surplus of emission allowances emerged in the past few years, which led to a fall in prices for the allowances. As a consequence, low-carbon investments have decreased: the less expensive the allowances, the less attractive the investments to reduce greenhouse gas emissions. A quick fix, namely the "back-loading" of auction volumes through which the EC postponed the auction of 900 million allowances until 2019–2020 (Regulation 76/2014), was enforced on February 27, 2014, but structural reforms were still needed.

In this context, EU institutions adopted the MSR. It aims at addressing these supply–demand imbalances that would otherwise compromise the targets of the 2030 climate and energy policy framework. Such new MSR will come into force on January 1, 2019 and will bring substantial changes to the EU ETS. First, all the allowances that went unattributed between 2013 and 2020 will be placed in the MSR in 2020, as well as the 900 million allowances resulting from the "back-loading." Secondly, every year, 12 percent of the total number of allowances in circulation (whenever more than 100 million), as published by the Commission, will be deducted from trading volumes and placed in the MSR for a year.

Alternatively, whenever the total number of allowances in circulation is less than 400 million, 100 million allowances will be released from the reserve and added to the auctioning volumes. Finally, the European Commission will monitor the functioning of the MSR in its report, taking into account issues such as competitiveness or employment.

The MSR revision of the EU ETS scheme should leave industrials with a number of emission allowances in circulation easier to manage, but should also lead to higher prices. It paves the way for a broader revision of the European carbon market, which may include the creation of a fund to promote low-carbon industrial innovation projects, based on the auction of 50 million allowances before 2021.

"Paris 2015": Very High Expectations to Tackle Climate Change   

In December 2015, Paris will be the capital city of the environment, as it will be hosting the 21st Session of the Conference of the Parties to the United Nations Framework Convention on Climate Change ("UNFCCC"), also known as "Paris 2015," from November 30 to December 11, 2015.

For "Paris 2015," all members of the UNFCCC (195 nations plus the EU) have agreed to adopt a new global climate agreement, which would take effect in 2020. In short, this agreement aims to merge all binding and nonbinding arrangements under the UNFCCC and to rebuild into a single comprehensive regime in the form of a new protocol. This will replace the Kyoto Protocol and will be binding on all UNFCCC parties, with the aim of keeping global warming below 2°C compared to preindustrial times, to avoid the most dangerous impacts of climate change.

The draft agreement, which will serve as a basis for the negotiations in Paris, has been made public recently. Divided in two parts—the first part presenting the measures to be adopted and the second part explaining the implementation of these measures—this draft agreement has already been widely criticized for its lack of ambition, notably as regards the decarbonization of the global economy.

Therefore, "Paris 2015" is facing very high expectations, and an agreement on the climate will be difficult to achieve. In this context, France and all its representatives will be playing a leading international role to ensure negotiations toward the adoption of a new global climate agreement.

Regional Clean Energy Investment Hub Established in Bangkok 

In August 2015, the UNFCCC launched the fifth Regional Collaboration Centre ("RCC") in Bangkok, Thailand, to promote clean energy investment in the Asia-Pacific region. The Bangkok RCC joins four other regional centers established by the UNFCCC to support the Clean Development Mechanism ("CDM"), a market-based mechanism forming part of the Kyoto Protocol that allows developed countries to offset their carbon emissions by funding emission reduction projects in developing countries. The CDM allows such projects to earn certified emission reductions, thereby encouraging clean energy investment.

The RCCs are designed to assist nations in identifying and developing CDM projects while reducing investor risk and transaction costs. The Bangkok RCC will partner with the Japanese Institute for Global Environmental Strategies and collaborate with the other RCCs in Togo, Uganda, Grenada, and Colombia. At present, there are approximately 7,000 CDM projects in the Asia-Pacific region, more than half of which are located in China. The new center aims to source funding for roughly 300 projects a year, with a focus on countries such as Cambodia, Laos, Myanmar, and Vietnam.

Japan Diversifies its Energy Mix 

In September 2015, Japan's Ministry of Economy, Trade and Industry ("METI") created a new council for the development of renewable energy policy and flagged the establishment of common energy-mix targets for Japan's power sector. The Subcommittee for Reforming Systems Related to the Introduction of Renewable Energy, a body made up of legal experts, engineers, scientists, and economists, is responsible for formulating and reviewing policies for the "sustainable introduction and spread" of renewable energy in Japan.

METI's energy-mix plan would require liquefied natural gas ("LNG") to account for at least 50 percent of power companies' energy production deriving from fossil fuels, with coal and other sources to account for 50 percent or less. Entities that fail to comply with these requirements after a grace period may be subject to improvement orders and fines.

Japan has an emissions reduction target of 26 percent (on 2013 levels) by 2030 and a renewable energy target of 22 to 24 percent by 2030. By that year, the country hopes to rely on coal for 26 percent of its energy needs, with LNG to account for 27 percent.

Australian Governments Commit to Renewable Energy 

In August 2015, Australia submitted its intended nationally determined contribution to the UNFCCC, which included an emission reduction target of 26 to 28 percent (on 2005 levels) by 2030 and a renewable energy target of 23.5 percent by 2020. The cornerstone of Australia's federal climate change policy, the "Direct Action" reverse-auction plan covered in previous editions of The Climate Report, has survived the leadership challenge in September 2015 that saw Malcolm Turnbull replace Tony Abbott as Australia's Prime Minister and leader of the conservative party.

However, there has been a significant change in the federal government's policy with respect to renewable energy investment. Responsibility for Australia's green investment bank, the Clean Energy Finance Corporation ("CEFC"), and the Australian Renewable Energy Agency, has been shifted back to the Federal Department of the Environment in a move widely interpreted as signaling a departure from the previous government's policy favoring the abolition of both entities.

A directive from the Abbott government to the CEFC not to invest in wind or solar energy has also been quietly dropped. In October 2015, the Federal Minister for the Environment announced that the CEFC would finance an AU$30 million program of works aiming to reduce emissions in the city of Melbourne. The program will include rooftop solar power as well as upgrades to commercial buildings and public infrastructure.

There have also been some major developments at a provincial level. In September 2015, South Australia announced that it would increase its renewable energy target to 50 percent by 2025, having met its prior target of 33 percent by 2020. Queensland has pledged to source 50 percent of its energy needs from renewable sources by 2030, while the two largest states, New South Wales and Victoria, have each set a renewable energy target of 20 percent by 2020. The Australian Capital Territory, home to the nation's capital, aims to generate 100 percent of its energy needs from renewable sources by 2025, with wind farms, solar farms, and rooftop solar expected to meet 60 percent of its energy requirements by 2017.

Several of Australia's major capital cities have likewise adopted ambitious targets. Adelaide and Melbourne are in competition to become the world's first carbon-neutral city by 2020, while Sydney has an emission reduction target of 70 percent (on 2006 levels) by 2030.

Notwithstanding the above, Australia and New Zealand have rejected a push by smaller Pacific nations for the region to unite in advocating that climate change be limited to an increase of 1.5°C (compared to the United Nations' current target of 2°C).