How can the EU's flagship climate tool be saved?

The future of the EU's most important instrument to reduce greenhouse gas emissions is to be the topic of intense discussion in Brussels in the coming weeks, with both EU governments and members of the European Parliament divided over details of how to introduce a reserve for superfluous carbon permits.

The EU launched its "flagship" emissions trading scheme (ETS) in 2005 as a way to put a price on emitting greenhouse gases, which increase global warming.

Companies in a selection of sectors - power and heat generation, heavy industries like steel, cement and ceramics, and, since 2012, civil aviation - are obliged to hand in permits, so-called EU allowance units, for every tonne of carbon dioxide they emit.

The idea is that polluters decide themselves the most cost-effective way to reduce emissions: by investing in cleaner or more efficient energy or by paying for such investments elsewhere via allowances.

A year after the ETS was launched, the then environment commissioner Stavros Dimas i was buoyant.

“At the beginning of 2005 we were told by sceptics ... that the Emissions Trading System would never work”, Dimas said in a speech to members of the European Parliament in February 2006.

“Emission trading started at the beginning of last year and the first experiences are very encouraging. … In short - the system works.”

But a few years after Dimas' speech, Europe's economy fell into disarray, and so did the price for carbon.

The slump in economic activity led to less need for energy and industrial materials, in turn leading to a lower demand for emission allowances. The allowances that companies had received from governments for free, were more than enough.

However, the annual creation of new allowance units has continued, and now a surplus of already 2 billion allowances has been created.

As a result, the price for an EU allowance unit (EUA) has dropped significantly.

While in its first years EUAs were sometimes traded for as high as €30, the price for EUAs had dropped to its record low of €3 in 2013. Last year, the price fluctuated between €4.54 and €7.54.

However, the EU wants to continue with the ETS, and improve it.

When EU leaders met in October 2014 to agree on climate and energy goals for 2030, they reaffirmed the place of emissions trading in EU climate policy by calling it “the main European instrument” to achieve their targets.

They also agreed that a market stability reserve would be put in place, which was proposed in January 2014 by the European Commission.

Such a reserve would be able to temporarily take allowances out of the market, to help boost the price, and thus provide an incentive to companies to improve their energy efficiency and/or switch to renewable energy sources.

Climate and energy commissioner Miguel Arias Canete said in November 2014 that a market stability reserve "will (no doubt) stabilise the EU ETS and make it more resilient".

On Tuesday (13 January) representatives of EU governments in Brussels discussed a Latvian amendment of the Commission proposal. Latvia took over the six-month EU presidency on 1 January.

One of the main discussion points, which on Tuesday was not yet resolved, is when the market-stability reserve would be put in place.

The commission had proposed 2021, but in the Latvian plan, seen by EUobserver, the starting year has been put between brackets, a sign it is still under discussion.

Latvia has also introduced a discussion point on a batch of 900 million allowances, whose introduction into the system had been delayed.

Instead of allocating the batch in 2019 and 2020, as originally intended, Latvia suggests that the 900 million allowances are put in the reserve.

Germany and the United Kingdom have come out in favour of a kick-off in 2017, while Poland and the Czech Republic oppose an earlier launch of the reserve.

Meanwhile, the European Parliament is also set to voice its opinion on how the reserve should look.

MEPs are equally divided over the start date, sometimes even within a political group.

While MEPs Marek Grobarczyk and Evzen Tosenovsky i, respectively Polish and Czech members of the conservative ECR group, call for a 2023 introduction date, their fellow group member from the United Kingdom, Conservative MEP Ian Duncan i, is calling for 2017.

Amendments also show that there is no consensus yet on the amount of allowances that should be taken out of the system and put in the reserve.

Parliament's environment committee, which has the lead in the dossier, is set to discuss the issue next Wednesday (21 January). A day later the industry committee is set to vote on a document outlining its opinion.

Latvia is hoping parliament will quickly agree, so that negotiations for the ETS market-stability reserve can be introduced before the last day of the Latvian presidency on 30 June.

The reserve is only the first step of a wider reform of the ETS, but the commission wants to have the reserve in place before it tables additional measures.