European Parliament’s Environment Committee (ENVI) has upheld the decision that disallows 900 million excess carbon credits from being held back until 2018-20.

At a meeting on Wednesday (19 June) ENVI tabled several amendments to the EU Emission Trading System (ETS) proposal, to include ‘stricter conditions’.

ETS system background

Under the ETS system 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 aims ‘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 hopes 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 to less than €5 (in January 2013), with some saying that the scheme is now ineffectual and ‘too weak’ to produce any credible incentives to cut emissions.

To counteract this, the European Commission (EC) suggested changing the current system so that the amount of current surplus carbon allowances in the market could be cut ‘to rebalance supply and demand and to reduce price volatility without any significant impacts on competitiveness’. The proposal would have seen 900 million carbon allowances due to enter the market between 2013-15 held back until 2018-20.

However, at a plenary vote in April, 344 members of the European Parliament (MEPs) voted against the ‘backloading’ proposal, with 315 MEPs voting for it, and six abstaining. It is thought that pressure from heavy industry such as oil and coal led to many MEPs to vote against the proposal.

Speaking after the vote, European Commissioner for Climate Action Connie Hedegaard said the Commission “regrets that the European Parliament has not approved the backloading proposal”. She went on to note, however, that “when it was suggested in the second vote that the Parliament finalised its rejection right away, this was not supported”.

She continued: “Europe needs a robust carbon market to meet our climate targets and spur innovation. The commission remains convinced that backloading would help restore confidence in the EU ETS in the short term until we decide on more structural measures.”

Proposal needs ‘stricter conditions’

Having revisited the proposal on Wednesday, ENVI upheld the decision, adding that the principle needed ‘stricter conditions’ and an ‘earlier, predictable reintroduction of credits’. MEPs also proposed earmarking a portion of permit auction revenues for innovation.

A consolidated amendment text tabled by the European People's Party (EPP), Socialists and Democrats (S&D) and the Alliance of Liberals and Democrats for Europe (ALDE) groups, specifies that the Commission may, ‘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. 'The Commission shall make no more than one such adaptation and only in the third phase of ETS 2013-2020', the text adds.

Further, ENVI suggests that credits withheld should be reintroduced ‘in a predictable and linear manner starting from the year following that during which allowances have last been withheld’. The original draft from the Commission proposed returning them in 2019-2020.

Earmarking auction revenues to fund low-carbon technologies

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 energy-intensive industries, as well as for the ‘social and skill-related aspects of the low-carbon transition’.

Speaking of the amendments, European Parliament rapporteur Matthias Groote, who is steering the legislation through Parliament, commented: "We now have broader support for a solution that will allow the ETS to fulfil its purpose and support innovation to tackle climate change. I believe the full parliament will endorse our proposals and let us start negotiations with EU ministers as soon as possible.

“As I have always said, backloading is a quick, temporary fix. Structural reform of our Emissions Trading System will follow to ensure it remains the cornerstone of EU's climate policy and an inspiration to others around the world.”

The amended text is to be put to a plenary vote on 3 July in Strasbourg.

Watch a video on the emission trading proposal.