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UK Energy Secretary calls for "urgent structural reform" as EU member states approve ETS 'backloading'


UK Energy Secretary Ed Davey has repeated calls for "urgent structural reform" of the EU Emissions Trading System (ETS), as the European Council voted through plans to postpone the auction of up to 900 million excess allowances from next year.

Davey said that he was "pleased" that both member states and the European Parliament had now approved the "temporary" measure, which is intended to address a build-up of allowances caused by the lack of industrial activity during the economic downturn. However, more in-depth action was needed in order to reduce the price of carbon so that it could "provide a strong, long-term signal to stimulate low-carbon investment", he said.

The European Parliament agreed on amendments to its original proposals in July, clearing the way for approval by member states. The European Commission will only be able to carry out the 'backloading' exercise once, and must carry out an impact assessment setting out the risk of businesses in various energy-intensive sectors relocating outside the EU as a result of it, i.e. the risk of carbon leakage. The exercise will also be limited to 900 million allowances. The European Commission is expected to present its [final] proposals to member states in January.

The EU ETS was established in 2005 and was the first major emissions trading scheme in the world. Phase 3 began on 1 January 2013 and runs until 2020. Under the scheme there is a cap on greenhouse gas (GHG) emissions in line with national allocation plans from prescribed energy intensive installations, which must purchase allowances called European Union Allowances (EUAs). Operators of installations must hold EUAs equal to their total emissions at the end of each EU ETS year, and any  excess allowances can be 'banked' or traded with those who need to buy more allowances to comply with their emissions limits.

The price of allowances is currently €4.67 per tonne according to Thomson Reuters Point Carbon; well below a historical average of €30 per tonne. The 'backloading' proposal will allow the European Commission to transfer up to 900 million allowances that would otherwise have been made available for auction between 2013 and 2015 to later in Phase 3. Originally proposed at the end of last year, the scheme had been challenged by some member states as unjustifiable market interference.

In its first report on the carbon market, published alongside the original backloading proposal at the end of last year, the European Commission proposed six longer-term structural changes to the EU ETS. These could include increasing the EU's carbon reduction target from the current 20% to 30% by 2020, the permanent cancellation of a number of allowances or extending the scheme to cover additional sectors.

"The backloading of allowances is very much needed if the EU is to deliver the carbon reductions needed to meet the targets set by the 2009 Renewable Energy Directive, as the EU ETS is the main policy instrument to achieve these reductions," said energy and environmental law expert Linda Fletcher of Pinsent Masons, the law firm behind Out-Law.com. "However, this is only a temporary measure as it merely delays the auctioning of 900 million allowances rather than permanently taking the surplus allowances out of the scheme."

"That step is, however, one of the six options being debated as part of the structural reform of the EU ETS scheme and on which a decision needs to be taken early in 2014 to ensure the carbon price is sufficient to incentivise the reduction in emissions and also to give investors in low carbon and renewable energy projects certainty beyond the end of Phase III of the EU ETS and 2020. The UK's position, along with a number of other member states, supports the even greater target of an EU-wide 40% reduction in emissions by 2030, and its preference is to cancel an ambitious amount of allowances to address the surplus problem, so it will be pushing for the Council and the European Parliament to vote on this as soon as possible," she said.

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