Letters to Policy Makers

Letter to Environment Ministers ahead of the Council on the ETS reform

Dear Environment Minister,

Ahead of the informal Environment Council Climate Action Network (CAN) Europe would like to urge you to stand for significant reforms of the Emissions Trading Scheme.

In 2016, the carbon price in the Emissions Trading Scheme fell to around 4 Euro. As a result, the EU ETS is not meeting its aim to cost-efficiently cut Europe's climate emissions and fails to promote the low-carbon transition that is needed to implement the Paris Agreement. Now is the time for the EU to be united and coherent and ensure full alignment with the Paris Agreement's long-term objectives to hold temperature increase well below 2°C and to limit it to 1.5°C.

Independent research shows that the ETS will remain oversupplied until 2030 if the current proposals on the table are not significantly strengthened. In order to get the ETS to deliver emission reductions significant reforms are therefore necessary:

Cancellation of surplus

An enormous surplus of over 3 billion allowances has built up. Under current rules this surplus can be fully carried over to the next trading period. This surplus must be cancelled immediately and permanently through:

  • The permanent cancellation of all allowances in the Market Stability Reserve at the end of each period, starting at the end of phase 3.
  • The permanent, mandatory cancellation of allowances for “overlapping policies” at national and EU level that lower demand.
  • The permanent cancellation of all unallocated allowances from Phase 3.
  • We welcome a doubling of the take-out rate into the MSR, although we stress that this measure does not reduce the surplus and therefore cannot replace the points above.
  • Lowering the starting point for 2021 to actual emission levels

Without adjusting the starting level to actual emissions, the ETS would remain completely out of step with reality and a new very large surplus would be created in 2021, further depressing the carbon price. The starting point for 2021 should therefore be set at actual emissions (average 2017-2019 emissions).

Raising the Linear Reduction Factor

The Linear Reduction Factor (LRF) determines by how much the number of available allowances are reduced every year. The proposed LRF of 2.2% for the period from 2021 to 2030 was set in the Council Conclusions of 2014. This was long before the Paris Agreement set new long-term objectives which must be incorporated in EU climate policies. The LRF should therefore be raised to at least 2.8% together with all other measures mentioned here.

Including a revision clause that ensures the ETS is revised regularly and can be brought in line with Paris goals

As was already recognised in Paris, current 2030 commitments will lead to a temperature increase of 3°C or more. Therefore all countries need to revise and increase their commitments. The EU should ensure all of its policies contain provisions that allows regular review and updating, in line with the agreed international processes.

Ensuring all aviation (full scope) and shipping emissions are fully included in the ETS

International efforts to reduce aviation emissions fall far short of what is necessary for Europe to meet its Paris targets. A global measure to curb shipping emissions is not envisaged until after 2023 and faces further uncertainty without regional pressure from the EU. Europe must include these sectors in its 2030 climate commitments.

Increasing the carbon price signal in the EU’s material sectors

Support a review clause to assess the introduction of border measures and full carbon price through to preserve incentives for industry to innovate, while avoiding the risk of carbon leakage.

Using of ETS revenues for a just transition to a zero carbon society

All ETS revenues should be used to fund Europe’s rapid decarbonisation with an exclusive focus on energy savings and renewable energy. The ETS Directive should also include a fund to finance international climate action and a Just Transition Fund to support local communities and workers in regions impacted most strongly by the transition to a decarbonised economy.

 

Auctioning revenues are essential to finance this low-carbon transition. EU countries have so far received nearly €12bn revenues from such auctioning.  This vital revenue could multiply with a higher carbon price and an increased share of auctioned allowances. Empirical evidence proves that the Emission Trading Scheme has not had a negative impact on the international competitiveness of European industries – even though some sectors continue to claim otherwise. In order to make the system fairer as well as meaningful, the carbon leakage list needs to become significantly more targeted and ultimately all free pollution permits should be phased out.

Dear Minister, we are calling on you to advocate for these vitally necessary improvements to the Commission proposal to help Europe move towards a more socially just, low-carbon society and a more sustainable economy.

Thank you for your consideration. Please do not hesitate to contact us if you have questions or comments.

Wendel Trio, Director of Climate Action Network (CAN) Europe

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