European Parliament adopts text to pull corporate CO2 allowances from EU carbon trading market

Move aims to fix supply/demand issue and raise carbon price.

The European Parliament yesterday (July 8th) adopted the text for proposed regulation to introduce a ‘market stability reserve’ (MSR) during 2018. This would pull CO2 allowances handed to companies within the EU Emissions Trading System (EU ETS) in an attempt to support the carbon price, which dropped to a historic low of less than €3 per tonne at the start of 2013 as a result of excess market supply. Under the plans, the MSR would remove 12% of EU allowances from the market if the number of allowances in circulation reaches 833 million. Conversely, it would release 100 million allowances into the market if the number in circulation falls to 400 million. This quantity represents roughly 5% of the current annual emissions in the EU ETS.
In the shorter-term, the Parliament has also backed postponing (known as ‘back-loading’) the auction of 900 million allowances during the 2014-2016 phase of the ETS. The allowances will be held in reserve rather than returned to the market in 2019-20.
The European Parliament vote was the first in the tripartite approval process for EU regulation, which will now go to the European Commission, the executive arm of the EU, and finally the Council of Ministers, which represents the governments of EU Member States.The Parliament has called on the Commission to refer back to it should the current EU ETS proposal be changed. It has also requested that the Commission and EU Member States publish the total number of EU ETS allowances in circulation by May 15 each year, taking into account the allowances placed in or to be released from the MSR. It says the auction of any reserves should be smoothed over the year to ensure good market function. It said the Commission should monitor the functioning of the reserve in its annual carbon market report and look at the effects on EU corporate competitiveness, notably in the industrial sector, as well as the effects on GDP, employment, investment, and so-called carbon leakage, where emissions are ‘outsourced’ to company subsidiaries outside of the EU. The Commission has also been tasked with reviewing the functioning of MSR every three years to see if the supply/demand problem of the ETS has improved. It said: “The review of the functioning of the reserve should be objective and take into account the need to preserve regulatory stability and ensure long-term predictability in the transition to a low-carbon economy.”
The Institutional Investors Group on Climate Change has argued that the MSR start date of 2018 risks holding down the carbon price for several years and postponing any low carbon investment decisions.