EU Parliament agrees ETS reform, restricts speculator access

22 Jun 2022

Quantum Commodity Intelligence – After weeks of debate, lawmakers in the EU Parliament agreed on Wednesday to pass legislation to reform the bloc’s mandatory carbon market.

The bill, which in parts both toughens and weakens the EU Commission’s initial legislative proposal outlined in July 2021, seeks to deepen the emission reduction target, allow the EU to intervene if prices spike too high and include all emissions from ships leaving and docking in the EU in the emissions trading system (ETS).

The bill will now be negotiated with nations in the Council and the executive Commission before becoming law later this year.

“Finally, we got it. We adopted with a huge majority the biggest climate law ever. We are doing a big step for the climate, but also protecting jobs,” said Peter Liese, the lead lawmaker steering the bill through parliament.

The bill marks the end of months of debate between parliamentarians that were keen on strengthening the proposed legislation and those seeking weaken it.

The main thrust of the bill is to lower the portion of emission cuts the EU carbon market has to shoulder to help the bloc meet its goal to cut emissions 55% by 2050, with the Parliament voting to deepen the initial proposal from 61% cut to 63%.

The result is 120 million permits will be removed from the system over the next four years.

Parliamentarians also supported phasing out free allocation of permits to the energy intensive industry within 10 years while simultaneously passing measures to charge importers of those products the price of carbon allowances if they were manufactured outside the bloc.

The move is designed to increase efficiency while preventing carbon leakage abroad.

However, environmental groups were critical of the policy, saying it gives licence to some of the most polluting industries to continue emitting CO2 free of charge.

“The need to rapidly steer Europe and its industries away from fossil fuels and towards energy savings and renewable energy is greater now than ever, yet MEPs seem to think the ETS recipes of the past will still lead to success in the future. Unfortunately, they won’t,” said CarbonMarketWatch Policy Director Sam Van den plas.

Shipping

In shipping the parliament deepened the EU Commission’s proposal to charge all ships entering and leaving the bloc from 2027 50% of the cost of their emissions, opting instead to push for 100% of emissions to be charged – a change that may yet be rejected by ministers.

Another controversial part of the proposal was to limit the participation of non-installations and their intermediaries in the market over concerns that speculation was driving up carbon permit prices and contributing to energy inflation.

This is expected to be in the form of blocking permit holding accounts of companies that do not have emissions obligations or who they are acting on behalf of.

However, the market expects this to have little impact, even if it is eventually agreed, as it would not prevent trade in futures, where the bulk of liquidity lies and from where the spot market auction of permits takes price guidance.

It is expected the EU Commission may reject the measure given a study by its market surveillance body found speculators did not drive up prices.

And finally, parliament authorised a new carbon market to charge buildings and transport for emissions from 2025, although it limited the remit of the original proposal to the commercial sector.

In two other linked votes, lawmakers backed the world’s first carbon border adjustment tax to charge companies importing goods such as metals, cement and ceramics if they were produced in a country with weaker environmental restrictions as well as passing a measure to help poor households decarbonise.