Proposed legislative reforms to the EU Emissions Trading System are not enough to position the system as a main driver of decarbonization of Europe's economy, according to a report from Paris-based think-tank the Institute for Climate Economics.
Proposed reforms too weak to make EU ETS effective: I4CE
Other policies will achieve EU's targeted emissions cuts
EU Governance Regulation could address policy overlap
The market reform proposals currently under discussion by the EU Parliament, Council and European Commission are not sufficient to create an effective EU ETS in Phase IV, which runs from 2021 to 2030, according to a summary briefing Tuesday ahead of the full report due for release Wednesday.
"Indeed, GHG [greenhouse gas] emissions reductions coming notably from energy efficiency and renewable energy policies are sufficient to respect the EU ETS target, and thus the EU ETS is not a driver of decarbonization in industry and energy sectors over its Phase IV," I4CE said.
Negotiations between EU lawmakers and member state representatives aimed at overhauling Europe's carbon market are ongoing, with the next meeting scheduled for October 12.
The discussions involve finding agreement on measures to reduce a long-term surplus of carbon allowances; raising the overall ambition of the system; creating new funds for energy innovation and modernization; and protecting trade-exposed sectors from carbon costs.
According to I4CE, the current EU ETS emissions reduction trajectory is aligned with the low end of EU long-term climate ambition.
"Long-term EU climate objectives and the EU ETS trajectory should now be updated to integrate the objectives of the Paris Agreement, and should aim at 'net-zero' emissions by the second half of the century," it said.
Anticipating the EU ETS long-term target is necessary to have a sustainable and politically acceptable decarbonization pathway, the think-tank said.
"In that context, an EU-wide price corridor on the EU ETS could be one solution to the lack of anticipation of ETS operators and would lead to earlier mitigation efforts in ETS sectors," it said.
A carbon price corridor is not part of the European Commission's legislative proposals currently under discussion and is not expected to be part of the final Phase IV legislation, due to be agreed this year.
EC officials have said they do not want to act as a price manager in the EU ETS and prefer a volume-based approach such as the Market Stability Reserve, which is set to starting curbing the oversupply of allowances in 2019, based on predictable, volume-based quantitative thresholds.
I4CE also said a possible exit from the EU ETS by the UK adds to uncertainty of the current revision to the EU ETS Directive.
"In that case, careful attention should be paid to the adaptation of the emissions cap and the MSR parameters," it said.
"Finally, the framework for free allocation to prevent carbon leakage risks in industrial sectors is a focal point in the negotiations on the EU ETS reform," it said.
"We find that the positions of the Council and the Parliament on the EU ETS reform will probably result in a Cross-Sectoral Correction Factor [claw back of free allowances] triggered at the end of Phase IV, under conservative assumptions for benchmark decrease rates in major sectors covered by the EU ETS (refinery, cement, aluminum, steel)," it said.
"Unless an unexpected proposal comes out of the trialog negotiation, the revised EU ETS Directive will not be sufficient to deal with overlapping policies," it warned.
"The negotiations on other pieces of the [EU] climate and energy framework, and in particular on the proposed Governance Regulation, thus appear as an opportunity to create a consistent policy mix and manage the interactions between the different policy instruments," it said.
The Governance Regulation, proposed by the EC in November 2016, aims at ensuring the achievement of EU targets while ensuring policy coherence, within the framework of the EU's Energy Union.
