In a significant move, the Council of the European Union has adopted a position on the Phase IV EU Emissions Trading Scheme (EU ETS) reform file. The decision includes a measure to dynamically cancel volumes held in the market stability reserve (MSR), which unexpectedly increases the long-term ambition of the reform. Despite late negotiations, an agreement was reached with most of the EU population in favour of the proposal, allowing it to pass under new voting rules. Notable objections came from Italy and Poland.
Under the adopted position, regular cancellations of surplus allowances in the MSR will take place, instead of a one-off cancellation proposed by the EU parliament. Starting from 2024, if the total number of allowances in the MSR exceeds the previous year’s total auction volume, the difference will be cancelled. According to an analysis by lobbyists Sandbag, this measure could lead to the cancellation of 3 billion EUAs from the MSR during Phase IV, with a significant portion occurring in 2024. While the short-term price impact may be limited, this will strengthen the EU ETS in the long run by depleting the MSR of allowances sooner, resulting in a tighter supply/demand balance and potentially higher prices.
Another key aspect of the adopted position is the extension of the higher intake rate duration. The Council added a year, extending it until the end of 2023, compared to the EU Parliament’s proposal of 2022. This means that from 2019, 24% of the calculated EUA surplus will be removed from the auction volumes each year for the first 5 years, before reverting to the original 12%. Analysts estimate this supply reduction to be around 400Mt per year, which is expected to drive carbon trading prices higher as market balances become shorter on a yearly basis.
Additionally, the Council made an amendment to the auction share. The parliament had proposed a 5% flexibility mechanism, reducing auction volumes from 57% to 52% in the event of the Cross-Sectoral Correction Factor (CSCF) being triggered. However, the Council reduced this flexibility to 2%, aiming to protect the industry from a reduction in free allocation if the CSCF is triggered.
While the proposal is not in its final form and may still undergo amendments during trialogue discussions between the EU Commission, Parliament, and the Member States, the Council holds significant influence in shaping the reform. Previously, a weakening of the reform was expected, but the adopted measures indicate a strengthening instead. Both the EU Parliament and the Council must agree for the legislation to pass.
If you have concerns regarding these developments, consider exploring Redshaw Advisors’ Carbon Support Program, which aims to minimize and manage EU ETS risks.
