Since 2009 the EU Emissions Trading System (ETS) has experienced a growing surplus of allowances compared to emissions which has significantly weakened the carbon price signal. By the end of 2013 the surplus had grown to over 2.1 billion allowances, which corresponds to approximately the total amount of CO2 emissions generated by all sectors covered by the EU ETS policy in one year.
The surplus has been caused by several factors, principally the economic crisis, the extensive use of overlapping policies in the power sector and high imports of international offset credits.
Risk of undermining
The EU Commission recognised the risks of the surplus undermining the orderly function of the carbon market and proposed an establishment of a Market Stability Reserve (MSR) in January 2014.
Vattenfall has strongly supported the introduction of the MSR as a means to address the structural over-supply of allowances in the market and make the EU ETS policy more robust in the future.
A strong EU ETS will also reduce the need for an introduction of national CO2 policies such as in the UK or the one currently being discussed in Germany.
The political agreement that was reached on 5 May to establish a MSR in the context of the EU ETS directive builds on the Commission’s proposal. But it also contains several provisions which improve the way the MSR is introduced.
Stefan Dohler, Head of business area Markets at Vattenfall, welcomes the agreement. “Establishing the MSR marks an important step in the reform of the EU ETS policy as it can address the structural over-supply of allowances in the market and make the EU ETS policy more robust in the future.”
“What is particularly encouraging is that the EU institutions have recognised the need to design the MSR in a way that it has a clear impact on the EU ETS market already within the third trading period. In the agreement just reached, this is done mainly by introducing the MSR in 2019 - instead of 2021 - and directly transferring the so-called “backloaded” volume of allowances into the Reserve - instead of supplying them to the EU ETS market in 2019-2020 when there is obviously no demand for them.”
Dohler also calls for a wider reform of the EU ETS directive. “Especially important in that context is to revise the Linear Reduction Factor (LRF) which determines the long-term trajectory of the ETS allowance cap, so that it becomes fully aligned with the EU’s climate target for 2030 as adopted by the European Council in October 2014.”
The provisional agreement on the MSR still needs to be formally endorsed by the Council as well as the Parliament. “Vattenfall is confident that the legal implementation of the agreement will be as timely as the trialogue in order to avoid any unnecessary market uncertainties,” Dohler says.