Considerations on COM(2014)20 - Establishment and operation of a market stability reserve for the Union greenhouse gas emission trading scheme

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dossier COM(2014)20 - Establishment and operation of a market stability reserve for the Union greenhouse gas emission trading scheme.
document COM(2014)20 EN
date October  6, 2015
 
table>(1)Directive 2003/87/EC of the European Parliament and of the Council (3) establishes a system for greenhouse gas emission allowance trading within the Union (‘EU ETS’) in order to promote reductions of greenhouse gas emissions in a cost-effective and economically efficient manner.
(2)According to the European Council conclusions of 23 and 24 October 2014 on the 2030 climate and energy policy framework, a well-functioning, reformed EU ETS with an instrument to stabilise the market will be the main European instrument to achieve the Union's greenhouse gas emissions reduction target.

(3)Article 10(5) of Directive 2003/87/EC provides that each year the Commission is to submit a report to the European Parliament and to the Council on the functioning of the European carbon market.

(4)The report from the Commission to the European Parliament and to the Council on the state of the European carbon market in 2012 identified the need for measures in order to tackle structural supply-demand imbalances. The impact assessment on the 2030 climate and energy policy framework indicates that such imbalances are expected to continue, and would not be sufficiently addressed by adapting the linear trajectory to a more stringent target within that framework. A change in the linear factor only gradually changes the Union-wide quantity of allowances (EU ETS cap). Accordingly, the surplus would also only gradually decline, such that the market would have to continue to operate for more than a decade with a surplus of around 2 billion allowances or more, thereby preventing the EU ETS from delivering the necessary investment signal to reduce CO2 emissions in a cost-efficient manner and from being a driver of low-carbon innovation contributing to economic growth and jobs.

(5)In order to address that problem and to make the EU ETS more resilient in relation to supply-demand imbalances, so as to enable the EU ETS to function in an orderly market, a market stability reserve (the ‘reserve’) should be established in 2018 and it should be operational as of 2019. The reserve will also enhance synergy with other climate and energy policies. In order to preserve a maximum degree of predictability, clear rules should be set for placing allowances in the reserve and releasing them from it. The reserve should function by triggering adjustments to the annual auction volumes. Where the conditions are met, beginning in 2019, an amount of allowances corresponding to 12 % of the number of allowances in circulation, as set out in the most recent publication of the total number of allowances in circulation by the Commission, should be deducted each year from the auction volumes and placed in the reserve. In any given year, a corresponding number of allowances should be released from the reserve to Member States in the same proportions and order as applied when placing them in the reserve, and should be added to auction volumes if the relevant total number of allowances in circulation is less than 400 million.

(6)To this end, the Commission and the Member States should, without undue delay following the publication of the total number of allowances in circulation by the Commission by 15 May of a given year, ensure that the auction calendars of the common auction platform and, where applicable, of opt-out auction platforms are adjusted to take account of the allowances placed in or to be released from the reserve. The adjustment of the volume of allowances to be auctioned should be spread over a period of 12 months following the change to the relevant auctioning calendar. Given the need for a smooth operation of the auction process, further details on the adjustment, where necessary, should be set out in Commission Regulation (EU) No 1031/2010 (4).

(7)Furthermore, in addition to the establishment of the reserve, a few consequential amendments should be made to Directive 2003/87/EC in order to ensure consistency and the smooth operation of the EU ETS. In particular, the implementation of Directive 2003/87/EC may lead to large volumes of allowances being auctioned at the end of each trading period which could undermine market stability. Accordingly, in order to avoid an imbalanced market situation of supply of allowances at the end of one trading period and the beginning of the next with possibly disruptive effects for the market, provision should be made for the auctioning of part of any large increase of supply at the end of one trading period in the first two years of the next period. In order to further enhance the stability of the European carbon market and to avoid artificially increasing supply towards the end of the trading period which started in 2013, allowances not allocated to installations pursuant to Article 10a(7) of Directive 2003/87/EC and allowances not allocated to installations because of the application of Article 10a(19) and (20) of that Directive (‘unallocated allowances’), should be placed in the reserve in 2020. The Commission should review Directive 2003/87/EC in relation to those unallocated allowances and, if appropriate, submit a proposal to the European Parliament and to the Council on options for further action.

(8)The planned reintroduction of 300 million allowances in 2019 and 600 million allowances in 2020, as determined in Commission Regulation (EU) No 176/2014 (5), would undermine the aim of the reserve to tackle structural supply-demand imbalances. Accordingly, those 900 million allowances should not be auctioned in 2019 and 2020 but should instead be placed in the reserve.

(9)It is important that the EU ETS incentivise carbon-efficient growth and that the competitiveness of the Union's industries at genuine risk of carbon leakage be protected. The abovementioned European Council conclusions on the 2030 climate and energy policy framework gave clear guidance on the continuation of free allocation and carbon leakage provisions after 2020. Building on this strategic guidance, the Commission should review Directive 2003/87/EC, in particular Article 10a thereof, and submit a proposal for the revision of that Directive within six months of the adoption of this Decision. In pursuing the goal of a level playing field, that review should also consider harmonised arrangements to compensate for indirect costs at Union level. The review should also consider whether up to 50 million unallocated allowances should be used to supplement existing resources to promote projects referred to in Article 10a(8) of that Directive and low-carbon industrial innovation projects, with projects in all Member States including small-scale projects, before 2021.

(10)The Commission should monitor the functioning of the reserve in the context of its annual carbon market report. That report should consider relevant effects on competitiveness, in particular in the industrial sector, including in relation to GDP, employment and investment indicators. In addition, the Commission should, within three years of the date of operation of the reserve and periodically thereafter, review the functioning of the reserve in the light of the experience gained from its application. The review of the functioning of the reserve should in particular consider whether the rules on placing allowances in the reserve and releasing them are appropriate with regard to the aim of tackling structural supply-demand imbalances. The review should include an analysis of the market balance, including all relevant factors affecting supply and demand, and of the appropriateness of the predefined range triggering adjustments to annual auction volumes, as well as the percentage rate applied to the total number of allowances in circulation. Where the analysis indicates that the range is no longer appropriate in the light of changes in market developments and new information available at the time of the review, the Commission should swiftly submit a proposal to address such a situation. The review should also look into the impact of the reserve on growth, jobs, the Union's industrial competitiveness and on the risk of carbon leakage. The review of the functioning of the reserve should be objective and take into account the need to preserve regulatory stability and ensure long-term predictability in the transition to a low-carbon economy.

(11)Since the objectives of this Decision, namely to establish a market stability reserve and make it operational in the Union, cannot be sufficiently achieved by the Member States but can rather, by reason of their scale and effects, be better achieved at Union level, the Union may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 of the Treaty on European Union. In accordance with the principle of proportionality, as set out in that Article, this Decision does not go beyond what is necessary in order to achieve those objectives.

(12)Directive 2003/87/EC should therefore be amended accordingly,