European Scrutiny Committee Contents

14 European carbon market



COM(12) 652

Commission Report on the state of the European carbon market in 2012.

Legal base
Document originated14 November 2012
Deposited in Parliament23 November 2012
DepartmentEnergy and Climate Change
Basis of considerationEM of 6 December 2012
Previous Committee ReportNone
Discussion in CouncilNo date set
Committee's assessmentPolitically important
Committee's decisionCleared


14.1 Following the adoption of Directive 2003/87/EC, the EU's Emissions Trading System came into operation on 1 January 2005, and requires Member States to grant to undertakings in certain areas a permit covering emissions of carbon dioxide, and to establish for each of the first two trading periods (2005-07 and 2008-12) a national plan dealing with the total quantity of allowances and their allocation. Undertakings with a permit are then able to emit quantities of carbon dioxide up to the permitted limits, but have to surrender an allowance equal to their annual emissions.

14.2 The underlying aim of the System is to promote reductions of greenhouse gas emissions in a cost-effective and economically efficient manner, and is seen by the Commission as critical in driving a wide range of low-carbon technologies, and as being technology neutral, cost-effective and fully compatible with the internal energy market. It is now entering its third phase (from 2013-2020), which will incorporate a number of fundamental changes, in that the 27 individual Member State caps will be replaced by an EU-wide cap on allowances, which will decrease by 1.74% annually; auctioning will be the default system of allocation; any free allocation will be subject to harmonised rules; there will be stricter rules on the type of international credits allowed for use in the System; and 27 national electronic registries will be replaced by a single EU registry.

14.3 The Directive requires the Commission to report on the operation of the System, and it says that the purpose of this first report is to analyse the functioning of the carbon market, and to consider whether regulatory action is needed. At the same time, it also responds to a call from the European Parliament and the Council to examine appropriate structural measures to strengthen the System during phase 3 and to make it more effective.

The current document

14.4 The Commission notes that, at the start of the second trading period, it was expected that the cap would be ambitious, but that the economic crisis has radically altered the picture with there being a surplus of allowances and international credits compared with emissions. Thus, by the end of 2011, 8,171 million allowances had been put into circulation and 549 million international credits had been used for compliance, whereas verified emissions for the period 2008-11 were only 7,765 million tonnes, giving rise to a surplus of 955 million allowances.

14.5 The Commission observes that this supply-demand pattern has had a major impact on the carbon price, which fell to below €10 in the second half of 2011, when there was an accelerated build-up of a surplus in allowances and international credits. It adds that, due largely to temporary elements directly related to the transition to phase 3, a continued rapid build-up is to be expected in 2012 and 2013, with the supply of allowances increasing in the short term, notably through the forward selling of phase 3 allowances to generate funds for programmes on carbon capture and storage and innovative renewables; early auctioning to meet power sector hedging demand; and the selling of left-over allowances to national phase 2 new entrant reserves. It says that the combined effect of these amounts to some 500 million allowances by the end of 2013, and that, as the supply of international credits is likely to remain high, and emissions in 2012 and 2013 are not expected to change significantly, the surplus at the start of phase 3 could well be over 1.5 billion, or even 2 billion, allowances.

14.6 In the light of this analysis, the Commission says that there is a risk of seriously undermining the orderly functioning of the carbon market. It therefore proposes that the auctions of a certain amount of allowances planned for 2013, 2014 and 2015 should be postponed until later in phase 3, and it says that it is therefore preparing a draft amendment to the Auctioning Regulation. However, it points out that this "backloading" will not affect the structural surplus, and it therefore goes on to consider a number of structural options, including:

  • increasing the EU reduction target to 30% in 2020;
  • retiring a number of allowances in phase 3;
  • an early revision of the 1.74% annual linear reduction factor;
  • extension of the scope of the system to other sectors;
  • limiting access to international credits; and
  • discretionary price management mechanisms.

It says that these should be explored with stakeholders without delay, and that it will therefore launch a formal consultation process.

The Government's view

14.7 In his Explanatory Memorandum of 6 December 2012, the Minister of State at the Department of Energy and Climate Change (Mr John Hayes) welcomes the publication of this Report, as the Government has been pushing for a move to a 30% EU reduction target for 2020, and also in discussion of the Commission's back-loading proposals, for the immediate cancellation of an ambitious volume of allowances from the ETS. Whilst it has not yet secured this outcome, the publication of this Report will ensure that momentum will continue on discussion of structural reform of the ETS.

14.8 However, the Government is disappointed that the Report does not include information about the Commission's plans for the next steps, including a timetable for discussions and publication of legislative proposals, and it will press the Commission to provide these details to enable constructive and timely discussion of the options. The Government will also continue to work with other Member States and the European Parliament to ensure that the options contained within the Report are fully appraised and discussed without delay, in order to ensure that a legislative proposal for structural reform is forthcoming as soon as possible.


14.9 Although this is primarily a factual report, it is nevertheless of some wider interest in terms of the operation of the EU Emissions Trading System during the early stages of the next phase which commences in 2013, and it also sets out a number of options to address the structural surplus of allowances over emissions which is likely to persist after that date, and on which it intends to invite views. Consequently, although we do not think the document requires any further consideration at this stage, and are therefore clearing it, we think it right to draw it to the attention of the House.

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Prepared 2 January 2013