Europe agrees steps to fix EU Emissions Trading Scheme

by Search Gate staff. Published Fri 18 Sep 2015 14:14
Reserve mechanism agreed for the EU ETS
Reserve mechanism agreed for the EU ETS

The European Council has ratified the creation of a market stability reserve (MSR) for the EU greenhouse gas emission trading scheme (EU ETS), Europe’s flagship climate policy to reduce greenhouse gas emissions at the least cost whilst stimulating investment in the low-carbon economy.

The new system aims at tackling structural supply-demand imbalances in the EU ETS by automatically withdrawing a percentage of surplus allowances over a certain threshold into reserve each year. In the opposite case, allowances will be returned from the reserve to the market.

In 2013, there was a significant surplus of allowances in the EU ETS, which was expected to grow over the following years. This resulted from an imbalance between the supply and demand of allowances, since demand is flexible and affected, for instance, by economic cycles.

The presence of a large surplus lowers the prices of allowances and reduces the incentives for low-carbon investment. Therefore, if not addressed, the current market imbalance would affect the ability of the EU ETS to meet its targets in a cost effective manner in the future.

A cap is set on the total amount of certain greenhouse gases that can be emitted, and within the cap, companies receive or buy emission allowances which they can trade with one another as needed.

The Environment Council agreed on the MSR mechanism to tackle the surplus of allowances built up in the ETS over the last five years.

The Council also agreed the EU negotiating approach to the Paris COP. These set out a strong and positive position for the final negotiations to secure an ambitious global deal to tackle climate change.

The UK’s Secretary of State Amber Rudd said: “I welcome today’s agreement, which the UK has been driving forward and will enable businesses to remain competitive and grow as we move to a low carbon future.

“With just over 2 months to go until the climate change conference in Paris we are working hard to land a robust global deal that will mark the beginning of a global step change in efforts to limit global warming to 2 degrees in the long term.”

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