12 Emissions Trading System: market
stability reserve
| Committee's assessment
| Politically important |
| Committee's decision | Cleared from scrutiny
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| Document details | Draft Decision on the establishment and operation of a market stability reserve for the greenhouse gas emission trading system
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| Legal base | Article 192(1) TFEU; co-decision; QMV
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| Department | Energy and Climate Change
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| Document numbers | (35755), 5654/14 + ADDs 1-2, COM(14) 20
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Summary and Committee's conclusions
12.1 The third phase of EU's Emissions Trading System
(ETS) from 2013-20 introduced an EU-wide cap on allowances covering
emissions of carbon dioxide, and, although the cap had originally
been seen as ambitious, the reduction in the level of emissions
as a result of the economic crisis resulted in a substantial surplus
of allowances. The Commission therefore proposed that the planned
auctions of a certain quantity of allowances should be postponed
("backloaded").
12.2 However, as this would not affect the structural
surplus, it put forward in January 2014 this draft Decision establishing
a market stability reserve, and setting parameters for adjusting
auction volumes to address the mismatch between the largely fixed
supply of allowances and the fluctuating level of emissions. The
Government sees the ETS as a central component for delivering
cost effective emissions reductions, and therefore broadly welcomed
the proposal, although it stressed the need for a robust analysis,
based on clear and transparent rules, and respect for Member States'
fiscal sovereignty.
12.3 In our Report of 26 February 2014, we drew the
proposal to the attention of the House, but, in view of the Government's
comments, we decided to hold the document under scrutiny. In a
further Report of 14 January 2015, we noted that we had subsequently
received a letter from the Government, confirming that it supported
the proposal, but would be seeking to strengthen it in certain
respects, and saying that the conclusions of the October 2014
European Council had provided a political commitment to reforming
the ETS through the stability reserve. It added that discussions
amongst Member States were on-going, and that a plenary vote was
expected in the European Parliament in April — a timetable
it regarded as ambitious, but necessary to ensure that urgent
reform is delivered in order to provide certainty to industry
and restore the effectiveness of the ETS. It also said that, once
the stability reserve was agreed, the Commission was expected
to issue proposals for Phase IV of the EU ETS (from 2021).
12.4 We have now received a letter of 2 March 2015
from the Parliamentary Under-Secretary of State for Energy and
Climate Change (Amber Rudd), confirming that the trilogue negotiations
are nearing conclusion, and that final agreement is possible in
June, with the European Parliament's ENVI committee having voted
in favour of a strengthened reserve and to proceed to trilogue
negotiations, without a vote in Plenary. She adds that the UK
continues to be encouraged by the significant number of Member
States which support its position in the Council, and that she
is optimistic that Council will soon reach a qualifying majority
in support of strengthening the reserve. Since there is then a
risk that a Council vote will take place before a new European
Scrutiny Committee is formed following the General Election, and
she has requested either that scrutiny be lifted on the proposal,
or that a scrutiny waiver is granted, in order to allow the UK
to vote for the adoption of the proposal at a future Council meeting.
12.5 We are grateful to the Government for this
further update, and have noted the progress which has been made
since our last Report, not least in terms of the position of the
European Parliament, and in particular that the Government is
optimistic that an acceptable text will be agreed. In view of
this, the imminent dissolution of Parliament, and the likelihood
of a decision being taken before our successor Committee is formed,
we are prepared to clear the proposal from scrutiny.
Full details of the document:
Draft Decision concerning the establishment and operation of
a market stability reserve for the Union greenhouse gas emission
trading scheme and amending Directive 2003/87/EC: (35755), 5654/14
+ ADDs 1-2, COM(14) 20.
Background
12.6 The EU's ETs involves the granting to undertakings
in certain areas of allowances covering emissions of carbon dioxide,
and in the System's third phase (from 2013-20) allocations by
individual Member States have been replaced by an EU-wide cap.
Although the cap had originally been seen as ambitious, the level
of emissions was radically reduced by the economic crisis, meaning
there was likely to be a surplus of up to 2 billion allowances
at the start of Phase III in 2013. The Commission therefore proposed
that the auctions of a certain quantity of allowances planned
for 2013, 2014 and 2015 should be postponed ("backloaded").
12.7 However, as this would not affect the structural
surplus, it went on to put forward in January 2014 this draft
Decision, which would establish a market stability reserve, aimed
at addressing the current surplus in the short term, whilst making
the ETS more resilient to any potential future large-scale disturbance.
More specifically, as we noted in our Report of 26 February 2014,
the proposal would set parameters enabling the auction volumes
to be adjusted to address the mismatch between the largely fixed
supply and fluctuating demand, without affecting the total long-term
supply.
12.8 We also noted that the Government saw the ETS
as a central component for delivering cost effective emissions
reductions, and had long sought to address the surplus of allowances
and so strengthen the incentive for investment in low-carbon technology,
and avoid pressure for ad hoc reforms, such as back-loading, which
had added to the uncertainty. It therefore believed that a properly
designed market stability reserve with a clear set of rules might
give a more stable investment signal, remove a significant source
of uncertainty, and improve the resilience of the ETS: but it
also said that this needed to be supported by robust analysis,
based on clear and transparent rules, and respect Member States'
fiscal sovereignty.
12.9 We concluded that, given the central role of
the EU ETS, it would be right to draw the proposal to the attention
of the House, but that, as the Government's broad welcome had
been subject to a number of reservations, the document should
be held under scrutiny, pending further developments.
12.10 As we noted in our further Report of 14 January
2015, the Government subsequently drew to our attention its announcement
on 20 October 2014, confirming that it supported the proposal,
but would seek to strengthen it. In particular, it wished to see
an earlier introduction of the reserve in 2017, backloaded allowances
placed straight into the reserve, and amendments to ensure that
allowances remain in the reserve during "business as usual"
circumstances. We were also told that the conclusions of the October
2014 European Council had provided a political commitment to reform
the ETS through the market stability reserve, and that, although
there was currently no majority view, a number of Member States
supported the UK's approach, whilst others were being encouraged
to do so. The Government added that the European Parliament was
also discussing the proposal, and that a favourable vote in the
ENVI Committee on 23 February would be instrumental in getting
a positive outcome in the plenary vote, expected in April.
12.11 Finally, the Government commented that this
was an ambitious timetable, but one needed to ensure that reform
was delivered urgently. It also said that, once the stability
reserve had been agreed, the Commission was expected to issue
proposals for the Phase IV of the EU ETS (from 2021).
Minister's letter of 2 March 2015
12.12 We have now received a letter of 2 March 2015
from the Minister, confirming that that the trilogue negotiations
are nearing conclusion, and that final agreement is possible in
June. In particular, she says that, on 24 February, the European
Parliament's ENVI committee voted in favour of a strengthened
reserve and to proceed to trilogue negotiations, without a vote
in Plenary. She describes this as a positive outcome which will
help accelerate the negotiations, noting also that the Parliament's
position includes starting the reserve by December 2018 at the
latest; placing backloaded allowances directly into it; using
300 million of the unallocated allowances to fund industrial low
carbon innovation; and the EU ETS Directive (2003/87/EC), in particular
its carbon leakage provisions, being reviewed by the Commission
within six months of the reserve being agreed (and, if appropriate
submitting proposals).
12.13 The Minister adds that the UK continues to
be encouraged by the significant number of Member States (including
Germany, France, Sweden, Netherlands and Slovenia) which support
the Government's position in the Council, and that, in view of
this and the European Parliament agreement to a strengthening
of the proposal, she is optimistic that the Council will soon
reach a qualifying majority in support of strengthening the reserve.
In that event, she says there is a risk that a vote will take
place before the new European Scrutiny Committee is formed following
the General Election, and she has therefore requested either that
scrutiny be lifted on the proposal, or that a scrutiny waiver
is granted, in order to allow the UK to vote for the adoption
of the proposal at a future Council meeting.
Previous Committee Reports
Thirty-seventh Report HC 83-xxxiv (2013-14), chapter
5 (26 February 2014), and Twenty-ninth Report HC 219-xxviii (2014-15),
chapter 3 (14 January 2015).
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