The European Commission today put forward a legislative proposal to change the design of the EU’s Emissions Trading Scheme (ETS) after 2020, in hopes of creating a long-term fix to the problem of a chronically low price of carbon.
The reform would establish an automated ‘stability reserve’ which would withhold carbon credits from the market when needed. This would be triggered when the total number of allowances in circulation in a given year is below 400 million. In that instance 100 million allowances would be automatically released from the reserve.
If, for more than six consecutive months, the carbon price is more than three times the average carbon price during the two preceding years, the allowances will also be released from the reserve. This would apply even when the total number of allowances in circulation is more than 400 million.
A reserve was one of several options floated by the Commission in an impact assessment last year. A temporary measure put forward last year to backload (delay) a number of carbon allowances in order to raise the price of carbon met unexpectedly strong resistance from member states and the European Parliament, which objected to giving the Commission the authority to intervene in the market. For this reason, the long-term system of withdrawing or adding permits would be automatic, triggered by over- or under-supply reaching set levels. It would start in 2021.
Some had called for the Commission to set up a carbon ‘central bank’ which would have an independent regulatory board making decisions. But this system was deemed to be too complicated.
The price of carbon was meant to be around €30 per tonne at this stage, but it sits at around €5 per tonne. The economic slowdown and an over-allocation of free allowances are to blame. The designers of the system, created a decade ago, say they could not have predicted such a dramatic slowdown in industrial activity, which in turn resulted in fewer emissions.
The legislation, an amendment to the existing ETS regulation, will need to be approved by the European Parliament and member states.