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Environment ministers: agreement on emissions backloading needed by July

UK and European environment ministers have set out the "urgent steps" which the European Commission should take this year to reform the EU's Emissions Trading System (EU ETS).09 May 2013

In a joint statement, the UK's Ed Davey and ministers from eight other European member states called on national governments to agree on temporary changes to the troubled scheme "by July this year at the latest". Proposals for "proper structural reform" must follow by the end of this year, they said.

The ministers also called for "clarification on the key arguments and myths over the potential costs and risks" of 'backloading' a number of allowances under the scheme, as has been proposed by the European Commission as a temporary measure to address falling prices and lack of demand. The backloading proposal was narrowly rejected by the European Parliament last month.

"It is hoped that the joint statement will continue to put increased pressure on the European Commission to push through proper structural reform of the EU ETS so that it can be restored to an effective mechanism to stimulate low carbon investment across the EU," said environmental law expert Eluned Watson of Pinsent Masons, the law firm behind Out-Law.com.

"It shows Davey's continuing support for the 'backloading' proposal and highlights that time really is of the essence – a definite decision on backloading is requested quickly, to provide industry with the certainty it requires on the credibility of carbon markets to provide cost-effective ways to achieve emissions reductions. It also recognises that, in the long run, an overhaul of the existing EU ETS is required in order to make sure that it remains at the forefront of EU policies to combat climate change and that the details of the reforms need to be put together and actioned without delay," she said.

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 from prescribed energy intensive installations. Installations must purchase GHG emissions allowances, called European Union Allowances (EUAs), which represent the right to emit or discharge a specific volume of emissions in line with national allocation plans. Operators of installations must hold EUAs equal to, or more than, total emissions at the end of the EU ETS year and those with excess allowances can 'bank' them or trade with those who need to buy more allowances to comply with emissions limits.

The European Commission's proposals would see 900 million allowances that would otherwise have been made available for auction between 2013 and 2015 transferred to later in the third phase of the EU ETS. By doing this, the Commission hopes to address the build-up in allowances caused by reduced industrial activity during the economic downturn. The price of allowances is currently below €4 per tonne according to Thomson Reuters Point Carbon - well below a historical average of €30 per tonne.

In its first report on the carbon market, published at the end of last year, the Commission proposed six longer-term structural changes to the scheme. 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.

In their joint statement, the UK and European ministers acknowledged concerns around "market interference" which had resulted in the European Parliament's previous dismissal of the proposals. However, they said that a "one-off and targeted intervention now" would minimise market uncertainty, and prevent "greater costs in the long-term to meet EU 2050 objectives".

"As we have seen throughout the financial and economic crisis, targeted interventions may be necessary and we are convinced that only through proper structural reform and by giving investors a clear signal on Europe's low carbon ambition beyond 2020 can the EU ETS be restored to its original purpose of driving down carbon emissions and stimulating low carbon investments," they said.

Ministers from Germany, France, the Netherlands, Sweden, Denmark, Portugal, Finland and Slovenia joined the UK in signing the statement.

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