After more than 18 months of negotiations, the EU Council of Environment Ministers reached an agreement on a number of structural changes to the EU's emissions trading scheme, EU ETS, on Tuesday. Estimates suggest that more than 1.5 billion emission allowances will be permanently removed from the ETS market as a result, which in turn should lead to higher prices for allowances and the EU ETS being restored as one of the EU's most important instruments to cost-effectively reduce carbon dioxide emissions in accordance with the long-term climate targets.
Erik Filipsson is responsible for international climate policy at Vattenfall's department for Public & Regulatory Affairs.
What is Vattenfall's view of the agreement?
It is very positive that the Council has now agreed on a joint position for how the EU ETS should be reformed for the period after 2020. The decision by the EU's leaders demonstrates that they remain committed to emissions trading as a central pillar in the EU's climate policy and that they want to do something about the inadequate price incentive which emanates from the EU ETS at present. We feel that it is particularly welcome that the agreement contains several measures aimed at rectifying the major surplus of emission allowances in the EU ETS market in the short-term perspective.
What does this mean for Vattenfall?
For Vattenfall the decision means that many of the concrete proposals that we have been advocating over a long period have been incorporated, such as a strengthening of the Market Stability Reserve's (MSR) capacity and a permanent cancellation of a large number of emission allowances. Further, we feel that it is good that the strengthening of the system is supplemented with certain measures to protect the industries which are most exposed to a risk of CO2 leakage, i.e. that certain businesses which are exposed to global competition move to countries where the emissions are cheaper.
Which additional measures are needed?
Where the Council’s agreement falls short is mainly the insufficient support for raising the long-term ambition level in the system. On Tuesday, the Environment ministers agreed to raise the so-called Linear Reduction Factor (LRF) from 1.74 to 2.2 %. However, we would have liked them to go further and set the LRF, or in other words the annual reduction in the supply of allowances, at 2.6 % per year at least. After the decision in the Council and the Plenary vote that was conducted in the European Parliament earlier in February, it is clear that the EU's institutions are not prepared to go that far at this stage, although we know that this is a minimum for what is required in the long-term to adapt the legislation to the objectives of the Paris Agreement.
During the spring, representatives for the Council, the European Parliament and the European Commission will meet in order to hammer out the final legislative provisions based on the different positions that have been adopted by the EU's institutions in recent weeks. We hope that this process will proceed smoothly, which is plausible in view of the considerable degree of consensus that there is in these decisions, so that the revised EU ETS directive can enter into force by the summer.