ETS market stability reserve

Written by Dessislava Yougova

Policy makers and stakeholders agreed that the European Union Emissions Trading Scheme (EU ETS) needs to be reformed. After more than a year of discussions, the European Commission published in January 2014 its legislative proposal for a market stability reserve (MSR) in the EU ETS. The measure, to be introduced as of 2021, “would allow the Commission to add or remove carbon allowances from the system according to pre-set rules, to protect the EU ETS from economic fluctuations and to remove the surplus of free allowances that has accumulated over the last few years”.

ETS market stability reserve — © nfrPictures / Fotolia

But some issues related to the MSR cause strong division between EU decision-makers. These are notably the competitiveness of EU industries in the context of EU climate policy, the carbon leakage protection and the extra free carbon allowances granted after 2020, the back-loading of allowances, and the starting date of the measure.

The MSR issue was discussed at the Council (Environment) meeting on 17 December 2014 ( press release , p. 10).

On 7 January 2015, the Latvian presidency of the EU published a draft MSR compromise which was discussed at the Working Party on the Environment (WPE) on 13 January 2015.

The EP draft report , written by Ivo Belet (EPP, BE), was tabled on 24 November 2014. The vote by the Committee on Environment, Food Safety and Public Health, which is the leading committee for this issue, is scheduled for 24 February 2015 ( procedure file ). The ITRE committee’s draft opinion was published on 20 October 2014 and will be put to vote in committee on 21 January 2015 ( analysis in ENDS Europe).

A Workshop on ETS Market Stability Reserve was held in the European Parliament on 5 November 2014 ( summary in ENDS Europe) and a Live Panel Debate, ETS Market Stability Reserve: competitiveness vs. climate? , took place at the European Parliament TV studio on 8 January 2015.

There will be negotiations to agree a final text possibly in March and April 2015. The vote on the final text in the Parliament is expected in July 2015.

Overviews

Information from the Presidency on the state of play , General Secretariat of the Council, 5 December 2014, 6 p.
Background information in order to brief EU environmental ministers.

Reform of the EU carbon market: From backloading to the market stability reserve , Gregor Erbach, EPRS, October 2014, 10 p.
Review of the EU climate policies and recent developments in the EU carbon market, as well as of the EC legislative proposal and different stakeholders’ positions.

The Commission’s proposal for a Market Stability Reserve (MSR): presentation, Jos Delbeke, Director General, DG CLIMA, July 2014, 12 p.
Summary of the EU ETS history and current situation, overview of the structural reform debate and MSR architecture, ETS and the 2030 framework.

What is wrong with EU ETS and what are the solutions?

Climate Change: Balancing economic and environmental concerns, Andrei Marcu, in: Priorities for the Juncker Commission: Policy recommendations and advice , CEPS, October 2014, pp. 14-17
This chapter describes in brief the functioning of the EU ETS and identifies the causes and symptoms related to the recent problems of the EU carbon market. It explains also the relation between price of carbon and competitiveness.

What’s needed to fix the EU’s carbon market: Recommendations for the Market Stability Reserve and future ETS reform proposals , Carbon Market Watch Policy Briefing, July 2014, 8 p.
This brief analyses causes and consequences regarding the large amount of excess emissions allowances and recommends measures to fix the problems of the EU ETS.

Introducing short term flexibility in the EU ETS to assure its long-term credibility: a multi-criteria analysis of policy options , Zuheir Desai, Emilie Alberola and Nicolas Berghmans, CDC Climat Research, July 2014, 44 p.
This report presents a multicriteria analysis in order to evaluate five policy options that would introduce some flexibility in the EU ETS and potentially ensure its long-term credibility. These are: “an auction reserve price, permit supply rules that target a certain corridor of surplus (market stability reserve), permit supply rules that target economic activity, permit supply rules that target overlap with other energy policies and a rolling emissions cap.”

After Monetary policy, Climate policy: Is delegation the key to EU ETS reform? , Godefroy Grosjean [et al.], MCC, May 2014, 50 p.
This paper analyses the debate on whether the EU ETS needs to be reformed and if so how, including the delegation of the governance of the carbon market to an independent authority.

EU ETS reform in the Climate-Energy Package 2030: First lessons from the ZEPHYR model , Raphael Trotignon, Frédéric Gonand, Christian de Perthuis, Climate economics chair, January 2014, 8 p.
The ZEPHYR model simulates the supply and demand for allowances on the market, year after year. It is used in order to anticipate the possible impacts of the measures proposed by the Commission. This paper presents the simulation results and the possibility that the stability reserve could become a source of “instability”.
See also the presentation

Evaluation of policy options to reform the EU Emissions Trading System: Effects on carbon price, emissions and the economy , Martijn Verdonk [et al.], PBL, 2013, 72 p.
This report evaluates various options to structurally reform the EU ETS and concludes that “the preferred reform option depends on the appraisal of various arguments, such as the willingness to accept fundamental changes to the ETS, the value attached to predictability and stability of the emission price, and the interaction with other instruments within the EU climate and energy package.”

Analysis of ETS MSR

The Market Stability Reserve in Perspective , Andrei Marcu, CEPS, October 2014, 18 p.
This special report “discusses the MSR’s rationale and reviews the different options available for its design, governance and timing, as well as its consequences for the functioning of the EU ETS and the EU’s climate and energy policy.”

Slaying the dragon: Vanquish the surplus and rescue the ETS , Damien Morris, Sandbag, October 2014, 80 p.; see also the presentation
This report reviews the effect of recent changes to the ETS rules. It considers that MSR is a potentially powerful new feature but it is only the first item of the EU ETS reform which should address competitiveness fears by ensuring ETS rules stimulate green growth in Europe.

EU ETS reform: Assessing the Market Stability Reserve , Lars Zetterberg, Daniel Engström Stenson, Susanna Roth, IVL Swedish Environmental Research Institute, September 2014, 14 p.
This policy paper analyses how the MSR affects the function and efficiency of the EU ETS. The authors consider that proposed MSR has some merits for a temporary removal of allowances but they are less certain that it constitutes the best option for strengthening the functioning of the EU ETS.

Dynamic allocation for the EU Emissions Trading System: Enabling sustainable growth , Bram Borkent [et al.], ECOFYS, May 2014, 43 p.
Free allocation of allowances is intended to preserve the international competitiveness of Europe’s industries and to prevent so-called “carbon leakage”: the relocation of production and as a result greenhouse gas emissions from Europe to other regions with lower carbon costs. This report describes and analyses an improved system of free allocation of emission allowances that could enter into force as of 2021.

The European Emissions Trading System (EU ETS): Ex-Post analysis, the Market Stability Reserve and options for a comprehensive reform : Nota di Lavoro, B. Knopf [et al.], FEEM, 2014, 42 p.
As it considers that “the Market Stability Reserve proposed by the EU Commission is unlikely to address the current problem of price uncertainty and insufficient dynamic efficiency”, this paper describes an alternative reform proposal. Its key element is to set a price collar in the EU ETS with lower and upper boundaries.

The Stability Reserve in EU Carbon Emission Trading: Does it deliver what it promises ?, Jörn C. Richstein, Emile J.L. Chappin, Laurens de Vries, in: Proceedings of the 37th IAEE International Conference , 2014, 15 p.
The paper analyses the backloading reform and the proposed market stability reserve using an agent-based modelling.