The European Parliament has voted to support reforms to the EU ETS (Emissions Trading System) that will curb the supply of EU Allowances (EUAs) post-2020, as a means of supporting the price of carbon and encouraging carbon abatement. The draft reform will now enter tripartite negotiations between the Commission, Parliament, and the Council.
The EU ETS is a cap and trade scheme that places a cap on emissions from 11,000 factories and power plants across the EU. Participants must submit EUAs equal to their emissions each year, the majority of which must be purchased at auction. However, the design of the EU ETS has resulted in an excess of EUAs in the market, particularly during periods of reduced economic output, and this has led the price to fall. In 2008, EUAs traded between €15 and €29/tCO2, but fell below €10/tCO2 from 2012 and are currently trading around €5.00/tCO2. In the UK, a tax known as the Carbon Price Floor is in place to act as a “top-up” to the price of allowances, but a firmer EUA price is required to encourage carbon abatement across the EU. For example, a higher carbon price would significantly increase the cost of generating from coal and, therefore, encourage the take-up of less carbon-intensive forms of generation.
The post-2020 amendments have been well-received by industry, but criticised by environmental groups because they are not as stringent as originally suggested. Rachel Solomon Williams, Managing Director at the think tank Sandbag, said, “Without being realigned with real emissions levels in 2020, the EU ETS may well end up existing for 25 years by 2030 without giving any substantial impetus to decarbonisation.” Analysis has shown that the carbon price must rise to levels of €30/tCO2 or higher to encourage significant moves away from carbon-intensive activities.
The relevance of these changes to the UK will to a certain extent depend on whether it remains in the EU ETS post-Brexit. One view is that there is little point in the UK remaining in a system over which it will have no say. Another is that it would be too complicated for the UK to leave the EU ETS and implement its own system, which would be required as one of many tools to meet climate targets. In addition, it would be more effective for the EU ETS to keep an EU-wide cap, particularly as the UK is a net importer of EU Allowances.