Members' Research Service By / November 12, 2014

Reform of the EU carbon market : From backloading to the market stability reserve

Written by Gregor Erbach The EU Emissions Trading System (ETS) aims to achieve cost-efficient reduction of greenhouse gas (GHG) emissions through…

© Kromosphere / Fotolia
Written by Gregor Erbach
Reform of the EU carbon market - From backloading to the market stability reserve
© Kromosphere / Fotolia

The EU Emissions Trading System (ETS) aims to achieve cost-efficient reduction of greenhouse gas (GHG) emissions through a market for trading emission allowances. The amount of available allowances is fixed in advance, in line with the EU’s GHG reduction targets.

Recent developments include a decision about the allocation of free allowances to heavy industries, in order to safeguard their global competitiveness, and a dispute about the application of the EU ETS to international aviation. The future of the EU ETS will also be influenced by upcoming decisions about the EU’s 2030 climate and energy targets and by on-going negotiations towards a new global climate agreement.

In recent years, weak demand for allowances – due in large part to the economic crisis – has led to a surplus of over 2.1 billion allowances and a fall in the price of allowances, which is now considered too low to incentivise certain low-carbon investments.

As a short-term fix, the auctioning of allowances in the third ETS trading period (2013-2020) has been delayed (‘backloading’). However, this does not reduce the surplus, as the ‘backloaded’ allowances will come onto the market towards the end of the decade. To improve the ETS’s resilience to fluctuating demand for allowances, the European Commission proposed to introduce a ‘market stability reserve’ for the period after 2020. The proposed mechanism would be fully automatic and predictable, without any need for political decisions. Some stakeholders have proposed to introduce the market stability reserve earlier, and to transfer the ‘backloaded’ allowances to the reserve.

Read the whole Briefing here

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