Carbon market reform central to 40% 2030 CO2-cut goal

EU countries agreed late on Thursday that a reformed emissions trading system (ETS) will be key to achieving an at least 40% carbon reduction target by 2030.

This gives carbon traders more certainty about the fate of the market stability reserve proposal and sent a bullish signal to prices early in Friday’s session.

The market stability reserve is the tool proposed by the European Commission to reform the ETS by making supply more flexible. Rumors that a reference to the market stability reserve could appear in the text on the 2030 energy and climate framework started to circulate on Thursday afternoon, just hours before the European Council met.

Carbon prices, which have been highly reactive to any news that could indicate whether the market stability reserve will be implemented or not, started to rise immediately to close the session €0.11/tCO2e higher day on day ( see EDCM 23 October 2014 ).

On Friday morning, traders came back to their desks to find confirmation that the text of the agreement announced overnight mentions an ETS with a market stabilty reserve as the main instrument to achieve the carbon reduction target, calculated on 1990 levels.

The reserve will help regulate the supply of carbon allowances by putting them into, and releasing them from, a reserve once the surplus hits certain thresholds.

As a result of the council decision, prices extended gains and were trading above €6.35/tCO2 by lunch time. “The sellers finally ran out of ammunition,” said one trader at a trading house on Friday morning. “It has been building up for a rally all week, but kept selling off back to low [six euro levels]… The sellers have [now] capitulated, whenever it sells off buyers step in and pick up volume,” he added, heralding further gains next week.

Carbon reduction target

To meet the binding emission reduction target, countries will be barred from offsetting emissions outside of Europe and will have to cut pollution domestically.

As part of the target, ETS sectors will have to cut their emissions by 43% and non-ETS sectors by 30% compared to 2005. In order to bring the ETS cap in line with the target, the percentage by which the cap declines annually will increase to 2.2%, up from the current 1.74% from 2021 onwards. For non-ETS sectors, countries will be set individual binding targets according to the principles of “fairness and solidarity”, according to the conclusions of the meeting.

Free allocation to industry based on benchmarks will still be around to prevent firms from leaving Europe and move to areas where climate costs are lower, “as long as no comparable efforts are undertaken in other major economies,” the text reads.

The deal came after intense negotiations which have seen coal-reliant Poland using its veto power to secure generous provisions. The text for instance stipulates that countries with a GDP per capita lower than 60% of the EU average can continue to give free allowances to the energy sector up to 2030.

A new pot will also be created and filled with 2% of the EU ETS allowances to fund investments in low income countries.

The EU Council also agreed to increase to 27% the share of renewable energy consumed and to cut energy consumption by 27% from projected levels. The renewable consumption target will be binding at the EU level but not at the country level. The energy efficiency target will only be indicative and will be reviewed by 2020 “having in mind an EU level of 30%”.

The targets expand 2020 goals of cutting emissions by 20%, raising the share of renewable energy consumption to 20% and improving energy efficiency by 20%. Silvia Molteni