Parliament’s ETS reform draft only pays lip service to the Paris agreement

Climate action

Europe’s Emissions Trading Scheme urgently needs to be reformed and now is the last chance to do so. It is also a chance for the Parliament to show it is serious about COP21. The current draft fails in this regard, writes Wendel Trio.

This op-ed was first published on on 2.6.2016

By Wendel Trio, Director of Climate Action Network Europe

Europe’s climate targets have been out of step with reality and for years, the ETS has suffered from a gigantic oversupply of pollution permits and as a result, very low prices that cannot drive emission cuts.

The 2020 ETS target has already been reached, but a market can only work if there is a balance between demand and supply. A glut of pollution permits flooding the market due to weak targets means insufficient climate action for years to come.

The reform for after 2020 is the very last opportunity to make the ETS relevant. If the ETS is not boldly reformed it will at best remain an ineffective paper tiger and at worst, undermine other climate action.

On May 31 Ian Duncan, the rapporteur on the ETS file in the ENVI Committee of the European Parliament, released his draft report on the ETS reform. Despite calling it a “triple-lock of ambition”, the report is in fact more of a triple bonus for industry.

Duncan has in earlier statements stressed the need for a higher carbon price. Unfortunately, his draft report does little to ensure the price for pollution permits will be high enough to drive change. Analysts estimate that the proposal would raise prices a mere €2 above those under the European Commission’s proposal.

The executive’s ETS reform proposal was launched half a year before the Paris Summit. Now the Parliament, who hailed Paris as a game changer, has to show that they are serious about putting Paris into action. The draft report fails to do so.

Shockingly, it proposes to postpone the discussion on raising ambition to well after 2023. To be precise, the proposal is that the Commission starts planning for a possible review after the 2023 global stocktake. This is not in the spirit of the Paris agreement, where the first stocktaking is scheduled for 2018.

It is also unacceptable if the EU wants to stay credible. Most importantly, keeping insufficient reduction targets for another ten years or longer would ruin chances for staying below 1.5 degrees Celsius of warming.

Both the Juncker Commission’s proposal and the draft report fail to broach the most vital issues that must be addressed if the ETS is to be turned into a functioning policy instrument. These include eliminating the surplus and raising the target.

The Market Stability Reserve which, starting in 2019, will temporarily remove surplus permits from the market, may be able to raise prices temporarily — although the jury is still out on how much it will actually influence them. Crucially, the MSR does not lead to higher ambition in the long run as all permits would come back to market at a later time.

The ENVI Committee draft report includes many exceptions for industry that would in no way encourage them to lower their emissions. Instead of giving industry millions of free pollution permits, revenues from the sale of ETS pollution permits should be maximised.

This can only happen if the price is much higher and if free allocation is phased out, and as an interim measure, targeted in a way that industries that do not face a risk of carbon leakage do not receive free permits. Revenues should then be used to fund a just transition to a fully decarbonised Europe by the middle of this century. ETS funds should also be used to fund climate protection abroad.

We call on members of the European Parliament and on member states to wake up to the reality that the ETS has been failing to drive climate action and that only bold reforms that increase the target and curtail the number of pollution permits will change that.