The centre-right EPP political group adopted a common line for post-2020 ETS reforms on Wednesday, ruling out faster CO2 cuts and stressing the “need to create as much room for manoeuvre as possible” on free allocation.

The group’s MEPs collectively agreed on key priorities and seven detailed positions in an effort to influence the ongoing ETS reform talks. The EPP holds 29% of EU Parliamentary seats but has often struggled to hold a unified a position on climate policies.

“The EPP Group wants the ETS to remain a vital pillar of our climate policy and a driver of sustainable growth in Europe. Attracting investment in clean technology will be crucial to meeting our climate challenges. Therefore the cleanest companies should be given incentives to do even better and should get adequate protection against the risk of carbon leakage,” it said in a paper on its website.

Its detailed proposals included keeping the Commission’s proposed 2.2% annual linear reduction factor (LRF), in contrast to calls by some MEPs to deepen it to ensure a prompt alignment of the bloc’s 2050 emission trajectory with the Paris Agreement’s 2C temperature goal.

In keeping with its aims to ensure industry gets enough free allowances, the EPP also proposed several ways of boosting industry’s share of free allocation, mainly at the expense of the share proposed to be sold at auction by governments.

The LRF is the main part of the Commission’s proposal that could impact the EU carbon price, which the Commission has said could average €25 over the next decade. However, boosting the share of free allocation could also be bullish for EUA prices as industrial firms tend to hoard their units.

The EPP’s seven “main building blocks” for ETS reform are reproduced below:

1. Linear Reduction Factor

We stick to the agreed CO2 reduction target of 40% for 2030 and the Linear Reduction Factor (LRF) of 2.2%.

We will take on board the stock-taking exercise due to start in 2023 to analyse whether the process is in line with the Paris agreement and the actions of our global competitors (to avoid a European Parliament majority already raising the level of ambition now).

2. Auctioning vs free allocation

The proposed share of free allocation (43%) should be raised, in order to allow for more room for free allowances and addressing the carbon leakage risk.

The allowances for the innovation fund should be taken from the auction share rather than from the free allocation share.

The proposal allows for the use of third period allowances for production growth in the fourth period (through the new entrants reserve, made up of unspent free allowances from the 3rd period and 250 million European Union Allowances (EUA) from the Market Stability Reserve (MSR)).

3. ETS vs non ETS

Achievements in the non-ETS sector, especially those that stimulate European jobs, in particular in the building sector and sustainable transport, will create more room in the ETS sectors.

We should consider bringing the cap for the aviation sector more in line with the other ETS sectors for intra-EU flights, however wait with any conclusions for intercontinental flights until the ICAO General Assembly in September this year.

4. Free allocation

a. Carbon leakage

Here, several scenarios on the table centre around a tiered approach. Given the complexity and possible unwanted side effects of those scenarios that do not necessarily bring more fairness, we propose to keep the 2 proposed categories and focus instead on the (adaptation of the flat rates of the) benchmarks and a more targeted cross-sectoral correction factor.

Other elements that can, if possible and necessary, be taken on board include:

– phasing out, or lowering the free allowances for sectors not at risk of carbon leakage;

– keeping the option of a qualitative assessment under certain conditions and when justified;

– taking on board geographical considerations, while being aware that in practice this is hard to define;

– and adapting the 0.2 threshold.

Measures to address the problem of investments leakage should be examined, for example through super credits, similar to those foreseen in the CO2 car regulation (for example, an extra amount of free allowances to the 5% best-performing installations in a sector).

b. Production

We should bring allocation closer to actual production levels, relying on the most up-to-date possible production data.

We need to fine-tune the current thresholds for production increases/decreases in the directive.

c. Benchmarks

Benchmarks should be updated more regularly (at least once shortly before the start of the trading period) on the basis of technological progress, real performance and verified emission data in order to take into account technological improvements.

We need to work with more fine-tuned flat rates. This could be done through, amongst other things, introducing extra categories or changed limit values, taking into account non-avoidable emissions.

d. CSCF

The main aim is to avoid the CSCF from applying and limit it to the extent possible.

A more targeted approach is needed should the CSCF be triggered: when the C- factor comes into effect, the most exposed sectors should be exempt.

5. Indirect costs

The MSR regulation (recital 9) specifies that “In pursuing the goal of a level playing field, the ETS review should consider harmonised arrangements to compensate for indirect costs at Union level”.

Therefore we need to develop a common model at EU level for at least partially covering indirect costs. Member States can further top that up with national support (under certain conditions).

Possible action includes:

• x% of auctioning share to be pooled at EU level and allocated to cover a relevant proportion of indirect costs;
• clarifying and codifying the state aid guidelines within the ETS proposal.

6.  Funding for innovation and modernisation

Modernisation fund: we should ensure, inter alia, that district heating modernisation can be supported, that allocation rules are clear and that a simple, transparent and balanced governance structure is set up.

Innovation fund (to be financed by allowances from the auction share): we should ensure that CCS and CCU projects can trigger support under the innovation fund/support, topping up the existing amount of allowances in the innovation fund.

Member States should partially attribute auctioning revenues to finance R&D, abatement opportunities and other measures to reduce GHG emissions and contribute to international climate policy objectives (earmarking) while avoiding possible distortive effects on the internal market.

Small projects as well as projects in non-ETS sectors should be supported, with clear rules on what projects are recommended.

7. Small emitters

Less stringent monitoring and reporting requirements for small emitters should be provided.

The opt-out threshold for small emitters should be increased.

By Ben Garside – ben@carbon-pulse.com