TheCompensators* » Carbon Market Reform Package

Carbon Market Reform Package

On November 15, the EU proposed various measures to adjust an oversupply of up to 2 billion emission allowances that are unlikely to decline before 2020. Climate Commissionaire, Connie Hedegaard argued that although there have been emission reductions in Europe since the creation of the ETS, an oversupply of allowances and a low price in carbon credits has negatively affected investments in energy efficiency and green technology. “We must not flood a market that is already oversupplied,” Hedegaard said.

Backload of Allowances

A ‘backload’ or delay in the auctioning of 900 million carbon allowances in Phase III of the ETS, which begins next year, for example, is also a measure that will be used to combat an oversupply of allowances. The 900 million figure was the middle option of the EU’s three suggested figures of 400 million, 900 million and 1.2 billion allowances.

Since the backload proposal was announced, carbon prices rose slightly to over €9 in anticipation of the move. This is an improvement on recent price lows of around €6 a tonne, although the price is still well below the €30 a which was predicted four years ago. Instead of canceling 900 million allowances, the EU plans to auction the backloaded allowances in the last two years of the 2013-2020 trading period. Market analyst believe that if the 900 million allowances were canceled, the price for emission credits would rise to €15 a tonne by 2020.

Remedies

Other potential remedies proposed were:

  • Increasing the EU emission reduction target to 30% in 2020;
  • Permanently cancelling a number of allowances in Phase III (as of 2013);
  • Increasing the 1.74% annual decline in the cap on allowances that can be allocated to member states up to and beyond 2020;
  • Extending the scope of the Emissions Trading System, or ETS, to other sectors;
  • Limiting the use of international credits in the ETS;
  • Introducing discretionary price management mechanisms, such as a carbon price floor or reserve price.

TheCompensators* believe that the EU should permanently cancel more than 900 million carbon allowances. Several studies have suggested that if the goal is to make renewable energy competitive and replace fossil fuels, the price of carbon allowances must be 50€. For this to occur, tougher remedies must be put in place.

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