Interview: German official talks upcoming EU ETS review

The German government would not like most unallocated emissions allowances to come to market, which would pressure carbon prices, but has not yet ruled out a limited return, according to a German official.

ICIS spoke with the head of emissions trading at the German environment ministry, Dirk Weinreich, on the sidelines of the CARBON EXPO conference in Barcelona Spain.

Germany is among the largest voting nations when it comes to deciding EU laws, so ICIS asked Weinrich for his views on the upcoming review of the EU carbon market rules surrounding unallocated EU emissions allowances (EUA), carbon leakage and redistribution funds.

The European Commission is due to release later this year a proposal on revisions to EU emissions trading system (ETS) rules for the period after 2020, or phase IV.

What should happen to unallocated allowances?

Unallocated EUAs were originally due to come back to market at the end of the phase III of the EU ETS in 2020, which could pressure prices.

After much debate, EU institutions earlier this month arrived at a provisional agreement on the market stability reserve, a buffer mechanism which would initially take out oversupply from the saturated EU carbon market.

As part of the agreement, they decided that unallocated allowances should be put in the market stability reserve instead of being auctioned. However, the use of the unallocated allowances will be decided in the phase IV legislation, which potentially leaves the door open to their return to the market.

The German government would not be keen on a widespread return. “We cannot imagine we can use them in a way where they are all put back in the market,” said Weinreich on Tuesday. “[Let’s] not weaken the success we just reached.”

However, other options on the table include using a limited amount of unallocated allowances for “innovative purposes” or for free EUA hand-outs to industry, according to Weinrich, although the German government has not yet reached a final position.

What should the rules be around free EUA hand-outs to industry?

One of the key issues around the phase IV proposal is how to address free EUA hand-outs to industry. The distribution currently takes place to limit the chance of carbon leakage, or the relocation of businesses to areas outside the EU with less stringent climate laws.

“Auctioning should be the principle method of allocation,” Weinrich said. “Industry should take a fair share of the burden under the ETS”.

However, Weinrich is still keen for carbon leakage provisions to remain.

“In general, it’s justifiable as long as there is no international regime,” Weinrich said. “We want to give these free allowances to those who are at most risk of carbon leakage”.

Under current rules, industrial companies received 80% of their allowance for free in 2013, with a linear decline to 30% by 2020.

Weinrich is keen to keep the cross-sectoral correction factor, which was implemented in phase III to further reduce the share of EUAs industry gets for free, due to an initial request that exceeded the limits set by EU rules.

The correction factor means that even the most efficient installations which meet EU-set benchmarks for calculating free EUAs would get a reduced handout.

How should redistribution funds work?

The EU needs to work out the rules for proposed low-carbon technology investment pots – the 400m EUA innovation fund and modernisation fund – which would be financed by carbon permit sales.

The innovation fund would be for energy producers and industrial manufacturers, while the modernisation fund aims to improve energy efficiency and energy systems by dedicating 2% of total EU ETS allowances to poorer EU countries.

The sale of EUAs for the funds would pressure carbon prices by bringing supply to market.

Weinrich would like to see strict rules around use of the funds, so that the pots are used solely for modernisation.

There is a “strong role for the commission in this process” and a “role for the EIB [European Investment Bank]”, Weinrich said. “We expect no fossil-fuel projects are subsidised by this”.

The commission is set to address the innovation fund in their phase IV proposal. ben.lee@icis.com