Members of the European Parliament (MEPs) have today (3 July) backed plans to withhold the auctioning of900 million excess carbon credits until 2018-20.

Under the Emission Trading System (ETS), businesses can receive or buy emission allowances (each one worth the right to emit one tonne of carbon dioxide (CO2), or the equivalent amount of two tonnes of nitrous oxide (N2O) and perfluorocarbons (PFCs)), which they can trade with one another as needed.

Introduced in 2005, the ETS system aimed ‘to combat climate change’ and reduce ‘industrial greenhouse gas emissions cost-effectively’ by limiting the amount of carbon emissions the 11,000 power plants and factories in 31 European countries can legally produce. Utilising a ‘cap and trade’ principle, it hoped to cut emissions to 21 per cent of 2005 levels by 2020.

The system has, however, led to a surplus of allowances on the market, meaning that the price for each allowance has dropped from highs of around €30 (£25.5) to less than €5 (£4) in January 2013, with some saying that the scheme is now ineffectual and ‘too weak’ to produce any credible incentives to cut emissions.

This in turn, led to the European Commission suggesting that 900 million credits due to enter the market between 2013-15 be withheld, or ‘backloaded’ until 2018-20 to ‘rebalance supply and demand and to reduce price volatility without any significant impacts on competitiveness’.

ETS amendment proposal

The initial proposal to backload the carbon credits was narrowly rejected by MEPs in April (334 MEPs voted against postponing the allowances, while 315 voted for, and six abstained), over concerns ranging from potential detrimental impacts on energy-intensive industries (EIIs), to beliefs that the proposals did not go far enough in fixing what some saw as a ‘broken’ system.

The proposal was then revisited by the European Parliament’s Environment Committee (ENVI) last month, which upheld the MEPs decision and tabled several amendments to the proposal, to include ‘stricter conditions’.

These included:

• an ‘earlier, predictable reintroduction of credits’;
• earmarking a portion of permit auction revenues for innovation;
• allowing the commission to, ‘in exceptional circumstances’, adapt the timing of auctions, provided an impact assessment shows the sectors concerned will not face ‘significant risk’ of companies relocating outside the EU (only one such adaptation in the third phase of ETS 2013-2020 will be allowed); and
• reintroducing credits ‘in a predictable and linear manner starting from the year following that during which allowances have last been withheld’.

ENVI also suggested capping the number of credits to be frozen at a maximum of 900 million. Of these, it said, 600 million must be made available to set up a fund to support the development of innovative low-carbon technologies, demonstration projects and measures intended to reduce the costs and carbon emissions of EIIs as well as for the ‘social and skill-related aspects of the low-carbon transition’.

It is this amended proposal text that MEPs have passed today.

‘ETS will not be the victim of short-term concerns’

Speaking of the vote, Matthias Groote, European Parliament rapporteur responsible for steering the legislation through parliament, said: "We now have a mandate, as parliament endorsed our proposals. We will start negotiations with EU ministers as soon as possible and seek a common solution that will allow the ETS to fulfil its purpose.

"Across all continents, Europe's experience of a market-based system for reducing CO2 emissions is being considered, and seen as a credible option, as most recently in China. We shall not let the ETS be the victim of short-term concerns. Structural reform of our Emissions Trading System will follow to ensure it remains the cornerstone of EU's climate policy."

The decision has been welcomed by many environmental and green businesses, with Paul Thompson, Head of Policy at the Renewable Energy Association (REA) saying: “We welcome the European Parliament’s vote, which will help restore some incentive for low-carbon generation in the EU. Although the UK has already introduced its own ‘Carbon Price Floor’ designed to top up the carbon price, it is clearly preferable for carbon prices to be stable across the EU. Today’s vote goes some way to achieving this, and will reduce the risk of UK energy-intensive industries being put at a competitive disadvantage.”

Thompson added that the EU ETS would soon need “wider-scale reform”, however, “to fix the longer-term problems with the market”.

Carbon market has been 'far too weak'

Indeed, many commentators have welcomed the development while also highlighting the work that remains to be done. Keith Taylor, Green Party MEP for the South East of England, said: "Today's vote gives us a chance to make the EU's emission trading scheme work properly.

"The carbon market has been far too weak and the price of carbon too low. Postponing the auctioning of these permits will allow the crisis-ridden emissions trading scheme do begin doing its job of actually cutting carbon emissions.

"The ETS proposals passed despite the intense lobbying of some of Europe's most polluting industries. Let's hope that this vote paves the way for the Commission to propose some deeper structural reforms to the ETS which enable us to cut our carbon emissions and create decent green jobs across Europe."

The UK's Secretary of State for Energy & Climate Change, Edward Davey, also welcomed the outcome of the vote, saying: "This is a good decision by the European Parliament and is an important step forward for climate change policy. We need a stable carbon market so we get a more certainty for investors so emissions reductions can be achieved at the lowest cost possible.

“There is still much work ahead, and we must now focus on securing agreement to the proposals in council in order to facilitate a deal.

“Alongside this, there should be a parallel focus on the urgent need for structural reform of the European Emissions Trading Scheme, in order to promote growth in low-carbon industry in the longer term. We are calling on the European Commission to bring forward legislative proposals by the end of this year, along with 11 other EU member states”.

ETS amendment “a short-term, sticking plaster”

Unsurprisingly, many in EIIs have spoken of their ‘disappointment’ with today’s outcome.

Ian Rodgers, Director of UK Steel, said: “UK Steel is disappointed that the European Parliament has chosen to support backloading, which is really only a short-term, sticking plaster and will do little to get the changes in place that are needed. If anything, it will be counter-productive because interfering with the market sends the wrong signals.

“It is now clear that the EU Emissions Trading System (ETS) in the longer term (beyond 2020) needs fundamental review. It is not working on several levels, including for energy-intensive industries.

“The parliament not only took the wrong decision on the fundamental question of backloading, but also rejected an amendment which would have provided much needed support for industries, including steel, that face significant barriers to reduc[ing] emissions. This would have ensured that energy intensive industries in Europe, such as steel, could have invested in long-term step change technologies to dramatically reduce greenhouse gas emissions, thus helping to achieve our overall ambition of tackling climate change globally.”

He added that he hoped member states will block the backloading proposals and “get on with the essential job of delivering a long-term solution for the EU ETS”.

Read more about the European Emissions Trading System.