Europe debates EU ETS phase IV review: state of play
Negotiations are currently ongoing on the design of the EU ETS for the period 2021-2030. Key elements of the review include the trajectory for the cap (Linear Reduction Factor), benchmark rules, options to address carbon leakage, and how the innovation and modernization funds will be financed.
Member state representatives have been discussing the European Commission’s proposal in a working group under the Council, the body representing EU member states since last year. Within the European Parliament, the European Committee on Industry, Research and Energy (ITRE) and the European Committee on Environment, Public Health and Food Safety (ENVI) will meet this month to discuss the draft reports submitted by the respective committee rapporteurs. Both reports include additional options for addressing the current surplus in the carbon market. The draft ITRE report introduces the option for member states to voluntarily cancel a share of auction allowances. The proposal by ENVI Rapporteur Ian Duncan would allow member states to move a share of auction allowances to the Market Stability Reserve (MSR). Both measures would enable unilateral member state policies to have a net mitigation effect under the EU ETS. However, it is unclear whether countries would be interested in voluntarily forgoing allowances which they could otherwise have auctioned.
Member states have also put forward options for reform. In February, France released a non-paper for a “Soft price collar for the European Carbon Market”. The proposal outlines a minimum price below which permits would not be sold at auction and an upper price where additional permits would be released from a reserve, similar to the design of the Cost Containment Reserve operating in California and Québec. However, without the support of other member states, this option has so far failed to gain momentum in the debate. Furthermore, on 20 June, France argued in the Environment Council that the linear reduction factor needs to be increased from 2.2% to 2.4% to be in line with the EU’s commitments under the Paris Agreement.
The review is expected to be completed next year. A final decision on EU ETS reform will need the support of both the Council and the European Parliament.