European Union countries agreed to modify how the bloc’s carbon market operates to keep more CO2 allowances available and reduce the risk of sharp price increases.
According to information published by Reuters, member-state ambassadors backed the change during a meeting held on Wednesday. The measure affects the EU Emissions Trading System, known as the ETS by its English initials.
The proposal was presented by the European Commission in April and is part of measures put forward in response to rising fuel prices linked to the conflict with Iran.
The EU will keep more CO2 allowances
Currently, the European carbon market requires major emitters such as power plants and factories to purchase enough allowances to cover their CO2 emissions.
These allowances can be traded on the market, and their price changes according to supply and demand.
Under the agreement reached by EU countries, surplus allowances would no longer be withdrawn automatically under certain circumstances. Instead, they would remain within the Market Stability Reserve.
The aim is to keep those allowances as a supply buffer that can be used when the carbon price posts significant increases.
Changes to the Market Stability Reserve
The Market Stability Reserve acts as a mechanism to regulate the number of allowances available within the ETS.
Under current rules, when the reserve exceeds 400 million CO2 allowances, the surplus can be removed. At the same time, the mechanism provides for the release of 75 million additional allowances when the European carbon price rises to more than double.
The agreement backed by the countries introduces a significant change to that framework. According to the draft cited by Reuters, no surplus CO2 allowances would be cancelled until 2030.
From 2031, the surplus would begin to be removed when the reserve exceeds 800 million allowances. That threshold would then decrease each year.
The ETS and electricity costs in Europe
The Emissions Trading System is one of the European Union’s main climate policy tools. Its operation incorporates a cost for CO2 emissions generated by certain industrial and energy activities.
However, Reuters notes that the ETS is not the main cause of the rise in energy prices recorded in Europe.
The changes respond in part to requests from governments such as Poland and Italy, which seek to limit the contribution of the carbon price to electricity costs.
According to the data cited in the report, the ETS accounts on average for about 11% of EU industries’ electricity bills.
That impact varies between countries. In economies with power generation more dependent on fossil fuels, such as Poland, the share is higher. In countries with a strong presence of low-emission nuclear energy and renewables, such as Sweden, its weight is lower.
The new rules still need to be negotiated
The agreement among member states is not yet the final version of the reform.
Now, European Union countries will have to negotiate the final rules with the European Parliament before they can enter into force.
The discussion will also determine how the Market Stability Reserve will operate going forward and how many CO2 allowances can be kept as a backstop against sharp moves in the carbon price.
The amendment therefore adjusts the balance between the availability of emission allowances and the operation of the European carbon market as the EU seeks to contain energy costs.
Source: Reuters
Photo: Shutterstock
