Market stability reserve: agreement with European Parliament approved
The member states permanent representatives endorsed the informal agreement reached between Council and European Parliament representatives on the decision concerning the establishment and operation of a market stability reserve (MSR) at their meeting on 13 May 2015.
The consolidated text presented today will be reviewed by the Lawyer-Linguists and then formally adopted by the Council at one of its forthcoming meetings.
The decision, which introduces measures to tackle structural supply-demand imbalances in the EU Emissions Trading System (EU ETS) caused by a surplus of emission allowances accumulating since 2009, is an important step in the fight against climate change and paves the way for the wider review of the EU ETS.
"I am pleased that the agreement is reached and COREPER approved it today" said Kaspars Gerhards, Latvian Minister for Environment, "It was a priority for the Latvian Presidency to establish the Market Stability Reserve in order to improve the operation of the carbon market in the EU. This is certainly a success."
Aim of the MSR
In 2013 the emission allowances surplus reached approximately 2,1 billion allowances - which was partly due to the economic crisis and has significantly weakened the carbon price. Furthermore, the structural surplus is expected to remain in the system up to and beyond 2020.
The decision proposes therefore to automatically withdraw from the market a percentage of EU ETS allowances that will be placed into a reserve if the total number of allowances exceeded a certain threshold. In the opposite case, allowances will be returned to the market.
Main features of the final compromise package
- a market stability reserve will be established in 2018 and will be operational from 1 January 2019
- "backloaded" allowances (the 900 million allowances whose auctioning was postposed from the years 2014-2016 until 2019-2020) will be placed in the market reserve
- unallocated allowances will be transferred directly to the MSR in 2020 and their future usage is to be considered under the wider EU ETS review
- temporary exemption of the "10% solidarity component" of allowances from the scope of the MSR until the end of 2025
- the EU ETS review is to consider the possible use of a limited number of allowances before 2021 to supplement existing resources to promote CCS, renewables and low-carbon industrial innovation projects
- the EU ETS and MSR reviews to take into account carbon leakage and competitiveness aspects, as well employment and GDP related issues.
What is the EU ETS?
The aim of the EU ETS is to reduce greenhouse gas emissions in an economically efficient manner.
The EU ETS is based on the so-called "cap-and-trade" approach: each year the EU establishes a limit (cap) for overall emissions from power plants, energy-intensive industry and commercial airlines covered by the system.
Within this limit, companies can buy and sell emission allowances as needed. Each allowance gives the holder the right to emit one tonne of CO2, the main greenhouse gas, or the equivalent amount of another greenhouse gas.
From 2013 to 2020, the cap is reduced annually by 1.74% and from 2021 onwards by 2.2%, reflecting the EU's new 2030 target for greenhouse gas emission reductions.
Altogether the EU ETS covers around 45% of total greenhouse gas emissions from the 28 EU countries.
The Commission submitted its proposal on a market stability reserve to the Council in January 2014, alongside its communication on "A policy framework for climate and energy in the period from 2020 to 2030".
In its October 2014 conclusions, the European Council agreed on the 2030 climate and energy policy framework for the European Union and endorsed a binding EU target of an at least 40% domestic reduction in greenhouse gas emissions by 2030 compared to 1990.
As regards the EU ETS, the European Council stated that a well-functioning, reformed Emissions Trading System with an instrument to stabilise the market will be the main European instrument to achieve this target and gave a number of further orientations, including on free allocation and the continuation of existing measures after 2020 to prevent the risk of carbon leakage.