The following issues must be addressed under upcoming legislative proposals following the October 2014 European Council conclusions on the EU's 2030 climate and energy framework:
Permanently addressing the surplus
The Market Stability Reserve does not provide a permanent solution to the surplus of EU ETS allowances, which may grow to over 4 billion by 2020. It only temporarily removes allowances and returns them to the market over time. Instead, surplus allowances need to be permanently removed as they weaken future climate targets and undermine an adequate pollution price signal. Legal proposals will have to provide a permanent solution that enables cancellation of surplus allowances.
Strenghtening the linear reduction factor
In the context of ratcheting up EU's 2030 emission target ahead of the Paris summit, the ETS linear reduction factor should be increased in line with an economy-wide target of at least 55% domestic greenhouse gas reductions by 2030 – a target required to ensure the EU's fair contribution to the global effort to prevent dangerous climate change. The European Commission's proposal to increase the linear reduction factor to 2.2% after 2021 is far from sufficient to achieve that purpose.
Revising the approach to protecting industries
When production costs for a business in one country get too high they may move their production to another country. So called „carbon leakage" occurs when the higher costs are due to stricter climate policies in one country and the company therefore moves to a country with weaker climate polices.
The European Commission's own impact assessment shows that there is no evidence for carbon leakage due to the EU Emissions Trading Scheme (ETS). On the contrary, industrial sectors accumulated a surplus of one billion pollution permits, worth well over €5 billion. More than 97% of industry's emissions currently receive free pollution permits. From 2013-2020, industry will receive around 5.5 billion pollution permits for free! As a result, the ETS has rather been a benefit than a cost to many energy intensive industries.
Free allocation led to significant loss of government revenues from auctioning, increased overall costs of climate policy and failed to stimulate investments in emission reductions and innovative technologies. The EU's approach to carbon leakage therefore needs to be significantly altered in order to support clean and competitive industries in Europe whilst at the same time avoiding overcompensation. The polluter pays principle should be respected and will need supplementing with support for additional clean and innovative industry investments. Auctioning of emission allowances instead of free allocations ensures simplicity and transparency and provides revenues that can support industries making the transition to low carbon solutions.
For more information, read our briefing on the lack of evidence for carbon leakage and our presentation on carbon leakage and competitiveness.