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European Union member states agreed on a compromise to seek the start of automatic supply cuts in the world's biggest carbon market in 2021, giving up plans to push for an accelerated introduction of the fix.
The deal, approved today in Brussels, allows EU governments to begin on March 30 negotiations with the European Parliament about the final version of the draft law on a market stability reserve, said Latvia, the holder of the bloc's rotating presidency. The reserve would ease a glut of permits that has pushed emission allowances down about 75 percent since 2008 to levels that fail to deter industry from burning coal, the most-polluting fossil fuel.
The agreement includes a provision to transfer permits delayed at government auctions in 2014-2016 into the reserve, preventing their return to the market in 2019-2020. The postponed, or backloaded, allowances account for almost half of the average annual pollution limit in the EU cap-and-trade carbon program.
"The decision is an important step in the fight against climate change and paves the way for the reform of the EU greenhouse gas emission trading scheme," the presidency said in a statement.
The compromise was reached at a second attempt today after member states failed to adopt a negotiating mandate during the first part of their meeting. The deadlock this morning pushed carbon prices down by as much as 4.4 percent as a U.K. and Germany-led coalition fought for an early start of the fix in 2017 and an alliance headed by Poland opposed bringing the reform forward.
Majority Support
The draft law on the reserve needs qualified-majority support from national governments and majority support by the European Parliament to be approved or amended. In its previous plan, Latvia sought nations' approval for a start of the fix "no later than 2021," a wording that could enable an earlier introduction and was objected to by the Poland-led alliance.
The group headed by the U.K. and Germany, which endorsed the launch of the reserve four years earlier than originally proposed by the European Commission, wanted to break the deadlock Wednesday and avoid delay in talks with the Parliament, according to the people with knowledge of the matter.
The reserve would automatically absorb carbon allowances in the EU emissions-trading system, or ETS, if the surplus exceeds a fixed limit, and release them to the market in the event of a shortage. The glut swelled to about 2.1 billion permits last year, according to EU estimates.
Backloaded Permits
The Parliament's environment committee voted in February to push for a start of the reserve by the end of 2018 in negotiations with governments. It recommended loading the reserve with the backloaded permits as well as adding allowances that aren't allocated in the 2013-2020 trading period of the ETS.
EU member states today didn't back the same treatment for unallocated allowances. The deal includes a provision that would enable the commission to address the issue under the planned review of the ETS for the post-2020 period. The commission has said it planned to propose it shortly after the market stability reserve law has been adopted, signaling it aimed for presentation before the EU summer break that starts in August.
