Last week finally saw an agreement between European Union national governments on the future of the Emission Trading System (ETS) carbon market, after talks that lasted 18 months. The deal could be bullish for gas demand, with the number of carbon credits constrained as the 2020s progress, adding to the cost of coal fired power generation, and making gas – which emits less than half the CO2 of coal – more attractive.
The deal produced an immediate reaction on the European ETS, with the near term and forward calendar carbon contracts moving higher. Dec 2017 hit €6/tonne CO2 in the morning of the 1st March, up almost 15% as a result of the news, although prices eased back later.
Sweden, France and the Netherlands led the push for measures to raise the European carbon price, and reached a breakthrough at the start of talks when they won Germany's support. Since the financial crisis in 2008, the market has suffered from an excess supply of permits, which has kept prices low. Among other things, the deal involves a 2.2% annual reduction in the number of allowances from 2021 onwards.
However, it was resisted by Poland and other big coal burners in Central and Eastern Europe. Poland's minister said he felt "cheated" by the deal, while Germany, Italy, Austria and Greece prioritised measures to ensure that regulation did not drive big industry abroad, such as the provision for a more flexible auction share.
In the end, 19 of the bloc's 28 nations supported the deal and nine nations voted against it. A minimum of 16 member states is required to back the compromise deal, representing at least 65% of the total EU population. The EU member nations need a common position before beginning talks with the European Parliament and the European Commission to finalise EU legislation around the reforms tabled by the Commission more than a year ago. The European Parliament has already adopted draft reforms of the carbon market that will go to plenary vote later this month.
Under the current ETS trading phase, which runs from 2013 to 2020, the majority of carbon permits are sold through government auctions, with most of the remainder given free to industry. The agreement means an additional 2 percent of these industry permits will also be auctioned, instead of being freely doled out to industry.
The final deal, published on 2nd March, also calls for a yearly cancellation of allowances held in the reserve after 2024 above a threshold to be set by the number of allowances auctioned the previous year. As a compromise, if offers a cushion for industries worried about being short on allowances if a cap is triggered on overall allocations that slashes free allowances across the board, known as the cross-sectoral correction factor (CSCF).
The cap-and-trade permit system is the EU's flagship policy to meet its goal of cutting greenhouse gas emissions from 11,000 energy-intensive industrial plants and power stations by 43% by 2030 when compared with levels in 2005.