EWEA Position on the Market Stability Reserve for the EU Emissions Trading System
The Market Stability Reserve is a good first step to restore the imbalance between demand and upply in the ETS;
Allowing permits to return to the market undermines the declining carbon cap principle of the ETS;
An early implementation of the Market Stability Reserve is required to reach a more significant carbon price before 2020, thereby providing a reliable and continuous price signal to investors;
In order to create scarcity in the EU carbon market before 2021, surplus allowances should be permanently cancelled.
Introduction The European Wind Energy Association welcomes the legislative proposal to establish a Market Stability Reserve for the EU Emissions Trading System as a structural measure to address the current imbalance in the ETS. EWEA considers the proposal for the Market Stability Reserve a good basis for discussion. A properly functioning Market Stability Reserve can make the ETS more resilient to events that disturb the supply-demand balance, including macro-economic shocks and a large inflow of international credits.
EWEA agrees with the Commission that an increase of the linear reduction factor after 2020 is insufficient to restore the imbalance between demand and supply.1 An ETS that would continue to operate for more than a decade with a surplus of around 2 billion allowances or more is not able to create a stable and robust carbon price that would influence investment decisions. A strong Market Stability Reserve should be able to address this imbalance while at the same time ensuring predictability. However, EWEA is of the opinion that the Market Stability Reserve as proposed by the Commission requires improvements and needs to be implemented earlier than 2021. Moreover, with an expected oversupply of 2.6 billion allowances by 2020, EWEA calls for the permanent retirement of urplus allowances.
No release of allowances EWEA opposes the provision for returning allowances from the reserve to the carbon market. The Commission’s proposal for two methods to increase the number of allowances – in contrast with only one method to decrease the number of allowances - goes against the very idea of a cap on emissions. The thresholds for upward adjustments as currently set by the Commission are too easily triggered and thereby are unlikely to fundamentally change traders’ behaviour. Moreover, the ETS Directive already allows the Commission to increase auctions of allowances in the event of excessive price fluctuations. EWEA therefore calls for a removal of this provision or – at least – additional barriers for a return of allowances, for example through a combination of more stringent volume and price thresholds.
Taking out more allowances EWEA agrees with the Commission that a set of clear and pre-defined rules should provide the market with predictability concerning any changes to supply of allowances. However, in order to reduce the urplus faster and to restore market balance, EWEA calls for more ambition to the proposed triggers, in order to create high adjustments in the first years of the Market Stability Reserve and thereby bring a urplus down faster. For example, with the Commission’s proposal for taking 12% of all allowances in
In the light of the EU 2030 Energy & Climate framework, EWEA considers that the linear factor should be increased well
before 2020 already.
circulation and with a surplus of 2.000 Mt, only 240 Mt. is taken into the reserve. As the Market Stability Reserve only takes small amounts of allowances out of an oversupplied carbon market, EWEA calls for a more ambitious and considerably higher percentage than 12%.
Early implementation EWEA calls on European policy makers to support an early implementation in order to have an effective Market Stability Reserve in place by 2016.2 By advancing the implementation of the mechanism, the carbon price can reach a more significant level and stabilise before 2020. This is important for two reasons:
If a high carbon price is realized only after 2021, the ETS will have no impact on investment decisions in the power sector before then. The further the EU pushes a higher carbon price into the future, the further it delays a transition to a renewable power sector. In that scenario, polluting and inflexible power assets such as coal power plants will continue to be built and operated until after 2020, the EU could lose its technology leadership in renewables and become locked into high carbon assets.
An early implementation of the Market Stability Reserve is required to ensure a smooth development of prices and to synchronise the ETS with the tightening of the EU’s overall carbonreduction target for 2030. The reintroduction of the backloaded credits will cause a collapse in the price in 2019/2020. This volatility should be prevented by reducing the surplus slightly from 2016 onwards, thereby providing a reliable and continuous price signal that is in line with the EU’s emission reduction objectives for 2030.
Pre-2020 retirement of surplus allowances EWEA believes it is key to create scarcity in the EU carbon market before the start of phase 4 in 2021. With an oversupply of 2.6 billion allowances in 2021– worth one year of ETS emissions – a post 2020 linear reduction adjustment will not start reducing the surplus significantly and increase carbon prices before 2025-2027. Backloading 900 million allowances will provide some short-term relief, but an estimated oversupply of 2.6 billion allowances will be back in 2019/2020. While the Market Stability Reserve is needed to increase the resilience of the ETS, it will not be sufficient to reduce the surplus wiftly and create scarcity in the market in the short term. EWEA strongly believes that creating scarcity in the carbon market will only be possible with a mix of adjustments. The Market Stability Reserve is part of this mix, but is not enough. EWEA therefore deems a permanent cancellation of surplus allowances before the start of phase 4 crucial.
Conclusion Scarcity in the ETS is required to make it effective and to provide a level playing field to renewable technologies by making coal and gas assets pay for the real costs of their GHG emissions. Only with a robust reform, including an early implemented ETS Market Stability Reserve and a removal of surplus allowances, EU decision makers can restore full confidence in the EU ETS. Anything else would be too little, too late.
For more information, please contact: Joël Meggelaars Regulatory Affairs Advisor EU ETS & Climate EWEA - The European Wind Energy Association asbl/vzw
Rue d'Arlon 80 | B-1040 Brussels Tel: +32 2 213 18 12 | Mob: +32 487 022 860 Email: email@example.com | Web: http://www.ewea.org
A similar call was made by the Environment ministers of the UK, Germany, Sweden and Denmark at the March Environment