Presidency ready to negotiate with European Parliament on Market Stability Reserve

The Latvian Presidency has a mandate to start negotiations with the European Parliament on the proposal for a decision concerning the establishment and operation of a market stability reserve.

The text agreed by the permanent representatives of member states on 25 March 2015 will be the basis for talks with European Parliament representatives. The first meeting ("trilogue") is scheduled for 30 March.

The decision is an important step in the fight against climate change and paves the way for the reform of the EU greenhouse gas emission trading scheme (ETS). Man-made greenhouse gases are largely responsible for warming the planet and causing climate change.

What is the EU ETS?

The aim of the EU Emissions Trading System (EU ETS) is to reduce greenhouse gas emissions in an economically efficient manner.

The EU ETS is based on the so-called "cap-and-trade" approach: each year the EU establishes a limit (cap) for overall emissions from power plants, energy-intensive industry and commercial airlines covered by the system.

Within this limit, companies can buy and sell emission allowances as needed. Each allowance gives the holder the right to emit one tonne of CO2, the main greenhouse gas, or the equivalent amount of another greenhouse gas.

From 2013 to 2020, the cap is reduced annually by 1.74% and from 2021 onwards by 2.2%, reflecting the EU's new 2030 target for greenhouse gas emission reductions.

Altogether the EU ETS covers around 45% of total greenhouse gas emissions from the 28 EU countries.

Why do we need a market stability reserve?

Since 2009, partly due the economic crisis, a surplus of emission allowances has accumulated in the system - reaching approximately 2,1 billion allowances in 2013 -and this has significantly weakened the carbon price. Furthermore, the structural surplus is expected to remain in the system up to and beyond 2020.

To correct the current market imbalance and to avoid similar problems in the future, the decision proposes to automatically withdraw from the market a percentage of ETS allowances that would be placed into a reserve if the total number of allowances exceeded a certain threshold. In the opposite case, allowances would be returned to the market.

Council negotiating stance

Following a detailed examination of the proposal at technical level, the main issues at stake for the Council are:

the starting date (2021)

the management of the "backloaded allowances" (the 900 million allowances whose auctioning was postposed from the years 2014-2016 until 2019-2020): to be transferred directly to the market reserve

unallocated allowances (currently set aside for new entrants or arising from plants closure): to be addressed by the Commission as part of the upcoming review of the ETS directive

Background

The Commission submitted its proposal to the Council in January 2014, alongside the communication on "A policy framework for climate and energy in the period from 2020 to 2030".

In its October conclusions, the European Council agreed on the 2030 climate and energy policy framework for the European Union and endorsed a binding EU target of an at least 40% domestic reduction in greenhouse gas emissions by 2030 compared to 1990.

As regards the ETS, the European Council stated that a well-functioning, reformed Emissions Trading System with an instrument to stabilise the market will be the main European instrument to achieve this target and gave a number of further orientations, including on free allocation and the continuation of existing measures after 2020 to prevent the risk of carbon leakage.