Brussels proposes emissions trading reform

Fewer free certificates for carbon dioxide emissions and more flexibility in their allocation are at the core of emissions-trading reforms proposed by the European Commission.

Introduced ten years ago, the emissions trading system (ETS) is Europe's most important tool for climate protection. But with carbon prices too low to reduce emissions it is in urgent need of an overhaul.

In the ETS, businesses that produce CO2 as a by-product must present certificates according to how much CO2 they emit. A portion of the certificates are allocated for free. Beyond that certificates must be purchased. Businesses that don't need all of their certificates can also trade them.

But the scheme has not worked as hoped. The economic crisis led to an oversupply of certificates, driving the price down to just six to eight euros (6.50 to 8.70 dollars) per metric ton of CO2 – compared to the target of around 30 euros (almost 33 dollars).

Fewer certificates and fewer free allocations

Now the Commission in Brussels is proposing to reduce the number of free certificates. The number of sectors eligible for the allocation of free certificates will be cut from 177 to 50. Some winemakers and tomato growers, for example, will be excluded from the free allocations, while heavy industry like cement factories and aluminum plants will stay in.

The proposed reform would mean a sharper reduction of the number of free certificates allocated every year starting in 2021. The Commission also envisions the allocation systemas more flexible in the future, to account for rising or falling production in particular sectors. An innovation fund would promote investment in new processes for CO2 storage.

The proposals came following fierce lobbying efforts, with industry warning that companies could reduce investment in Europe, moving their business to parts of the world with less stringent emissions regulations. "Carbon leakage," as this problem is termed, could have a net result of increased air pollution, undermining the EU's carbon goals.

Mixed reactions

German Environment Minister Barbara Hendricks welcomed the proposals. "They represent a balance between ambitious climate protection on the one hand, and ensuring the competitiveness of European industry on the other," she said.

Peter Liese, the environment speaker of the conservative European People's Party group in the European Parliament, was also pleased. Liese said he liked that the reform would require the building and transport sectors to reduce their CO2 emissions, which could for example promote the use of electric vehicles.

Criticism from the Greens and environmentalists

But the European Parliament's Greens branded the proposal "unambitious" and said it didn't do enough to take surplus certificates off the market. The Greens sharply criticized that under the Commission's proposal, millions of certificates transferred to a so-called market reserve would be distributed later, instead of being permanently cancelled.

The advocacy group Climate Action Network (CAN) accused the proposal of lacking vision and ambition, saying it was still far too generous with the allocation of free allowances. The environmental organization called on the EU to remove up to 4.5 million certificates from the market that will have accumulated by 2020.

CAN also proposes that revenue from the emissions trading system be invested in climate protection measures in poor countries. This could help with overcoming obstacles to a successful international climate agreement in Paris this December.

"The reform of the emissions trading system is a chance for the EU to restore its leading role on climate protection," said a CAN spokesperson.

The European Commission's proposal may be revised as it is still to be debated by representatives of the member states at the European Council of Ministers and then in the European Parliament.