The Member States of the European Union have reached an agreement to reverse the cancellation of ‘surplus’ CO₂ emission allowances under the EU Emissions Trading Scheme (EU ETS). This is set to remain in place until 2030 in order to mitigate the price shock caused by rising energy prices. The proposal still needs to be agreed with the European Parliament.
According to Reuters, diplomats from the countries reached an agreement on this on Wednesday, 23 September.
This decision is one way of reducing energy bills. It comes in response to requests from governments, notably those of Poland and Italy, to limit the impact of the ETS on the cost of electricity.
Although the European carbon market is the flagship of the EU’s climate policy, it is not the main reason for the rise in prices. The EU ETS accounts for around 11 per cent of energy costs. However, in countries where the share of fossil fuels is higher, this percentage is also higher.
Power stations, like other major polluting industries, are obliged to purchase carbon emission allowances.
The essence of the common position
At a closed-door meeting, the ambassadors of the participating countries agreed that the current practice of withdrawing surplus CO₂ emission allowances from the market should be stopped.
All unused allowances must be held in the Market Stability Reserve (MSR). They will serve as a supply buffer that can be released onto the market to offset fluctuations in the price of carbon allowances.
The current rules stipulate that the MSR has a capacity of 400 million allowances. Any surplus is subject to cancellation. However, countries are proposing to suspend this rule at least until 2030, with its reinstatement from 2031. However, from that point onwards, allowances will be considered surplus once the MSR reaches 800 million. It is proposed that this figure be gradually reduced thereafter.
The countries will subsequently discuss this proposal with the European Parliament.
As a reminder, on 15 September, the European Parliament announced its intention to raise the threshold for cancelling allowances from the Carbon Market Stability Reserve to 650 million from 1 January 2027. Previously, the European Commission had proposed abolishing the cancellation mechanism altogether.
In September, it emerged that national governments wish to make it compulsory to use 75 per cent of the revenue from the EU ETS for the decarbonisation of industry.
