Key EU lawmaker seeks to change the extent of the carbon market
(Bloomberg) – The main lawmaker leading the overhaul of the European Union’s carbon market is set to offer temporary waivers to a planned extension of the cap-and-trade program, as soaring carbon prices energy sends shock waves through the region’s economy.
Bloomberg’s Most Read
German lawmaker Peter Liese, who is leading reform in the European Parliament, is presenting temporary exemptions from a new market for heating and transport fuels, according to a draft report seen by Bloomberg News. It also provides for an amendment to advance the start of the new program by one year to 2025.
The waivers would give EU members the option to defer emissions trading for “fuels for private road transport and heating of residential buildings,” until 2027, Liese said in amendments to a proposed reform for the first time by the European Commission in July.
The amendments highlight the challenges Europe faces as it grapples with both an unprecedented energy crisis and an ambitious shift towards climate neutrality. Electricity prices in the region have risen as Russia, the largest supplier of natural gas, limited deliveries and intermittent renewables were not enough to meet growing demand.
The EU is stepping up its cap-and-trade program under the Green Deal, an unprecedented clean overhaul to reduce pollution by at least 55% from 1990 levels by 2030 and reach zero net by 2050. Reforming the carbon market will involve carbon limits, a phasing out of free emission permits and the inclusion of maritime transport. By toughening its climate policies, the EU wants to set a precedent for other countries seeking to clean up their economies to avoid catastrophic increases in global temperatures.
The project proposed by the European Commission in July is currently being debated by the European Parliament and Member States in the Council of the EU. Each institution has the right to propose its own changes, and then the final form of the law will be ironed out in discussions which will also involve the Commission. The whole process can take around two years.
Liese, the German lawmaker leading the reform through the European Parliament, has not proposed any changes to the key parameters determining the supply of emission permits in the existing carbon market until the end of this decade. ETS currently covers nearly 12,000 installations owned by manufacturers, power producers and airlines.
Read more: EU leaders fail to agree on energy amid carbon price dispute
The Commission wants to increase to 4.2%, from the current 2.2%, the rate at which the pollution ceiling decreases each year, known as the linear reduction factor. The higher LRF is to be complemented by a one-time reduction in the emission cap of 117 million allowances. The two together will result in a 61% drop in the pollution limit by the end of this decade from 2005 levels.
Expectations of stricter rules have already helped push carbon prices up 146% last year to a record high of € 90.75 in December, triggering calls from some European governments to curb speculation in the market . Liese – a member of the European People’s Party, the largest group in the EU Assembly – has not proposed any amendments to the existing complex rules on preventing excessive price growth.
Here are some other key changes proposed in the draft report, which is due to be finalized on Friday:
Advance the inclusion of maritime transport in the ETS by one year to 2025.
Establishment of a special Ocean Fund, financed by auctioning of emission permits, to help the maritime transport industry to decarbonise itself
Accelerate the phase-out of free permits for airlines within one year until 2026.
The introduction of a bonus-malus system encouraging faster emission reductions in the ETS, where the best performers would get additional free allowances and those who took no action would see their free allowance decrease.
Keep under consideration the phasing out of free allowances linked to the deployment of a tax on emissions imports, including a special reserve that would release free permits if the carbon border adjustment mechanism does not provide protection sufficient against carbon leakage.
Introduce tools to avoid the so-called intersectoral correction factor, which automatically reduces the number of free permits requested by Member States for manufacturers.
End the transitional free allocation for the electricity sector in certain Eastern European countries.
In the next step, members of the European Parliament’s Environment Committee will have the opportunity to propose their own amendments until February 16. The committee is due to hold a vote on all proposed changes on May 16.
Bloomberg Businessweek Most Read
© 2022 Bloomberg LP