On February 15, 2017, the European Parliament (EP) made a significant step toward reforming the EU Emission Trading System (ETS) post-2020, adopting a draft proposal that seeks middle ground with a tight vote of 379 for/263 against.
Since the 2008 financial crisis and most recently due to the United Kingdom’s pending exit from the European Union, the ETS has suffered from low prices (hovering around 5 euros/ton) on its excess supply of CO2, and the debate over ETS reform has carried on for years. In July 2015, the European Commission proposed a reform of the ETS for the period 2021–2030, with a particular focus on the aviation sector. Industry, environmental groups, and different EU member states are divided over how to reform this complex system. In particular, environmental groups in the EU have consistently held that the Commission’s proposed ETS reform does not go far enough to meet the EU’s pledge in the Paris Agreement to cut 43% of industry CO2 emissions compared to 2005 levels.
Highlights of the Draft Reform Adopted by the EP
(1) The EP approved the Commission’s proposal to increase the so-called “linear reduction factor”—the yearly reduction of credits—by 2.2% from 2021, compared to 1.74% in the existing legislation. It rejected other legislative proposals for a much faster removal of surplus carbon permits.
(2) To stabilize market prices, the adopted draft reform doubles the rate at which the ETS Market Stability Reserve (MSR) keeps excess allowances in each auctioning year, to 24% in the first four years.
(3) The draft reform cancels 800 million carbon allowances from the MSR in 2021, with another 200 million unused permits being scrapped if the cap on overall allocations, known as the cross-sectoral correction factor (CSCF), is not triggered.
(4) The draft reform allows for the share of auctioned allowances to be reduced by up to 5% in order to protect industries covered by the ETS against the impacts of the CSCF.
(5) Certain goods, in particular cement and steel, will be eligible for free allowances to prevent their relocating abroad to avoid environmental taxes. The EP rejected a proposed amendment to establish a carbon inclusion mechanism for importers of cement and certain other goods.
(6) The aviation sector will receive 10% fewer allowances than it averaged in 2014–2016 in order to bring its efforts in line with other sectors. Revenues from auctioning allowances in the aviation sector will be used for climate gas reduction projects in the EU and third countries.
(7) The draft reform also targets all emissions from the shipping sector, which is being included in the ETS for the first time in 2023. The shipping industry has already protested its inclusion, arguing that adding thousands of small shipping companies—many of which are not based in the EU—to the ETS will only complicate ETS reform.
The draft reform will now be referred to the EP’s Committee on Environment, Public Health and Food Safety, whose members will lead discussions with the EU Council (representing EU member states), and to the EU Commission, which could take months to agree to a final text. Environment ministers from EU member states will have the opportunity to influence negotiations at a February 28, 2017 meeting at the EU Council. EU member states with more carbon-intensive industries (such as Poland, which relies heavily on coal) may oppose reform, while those that depend more on renewable sources (such as Germany and Spain) are likely to be more neutral. National climate activities of individual EU member states (e.g., Germany’s reform of the Renewable Energy Sources Act (EEG)) will remain unaffected.