Malta calls for reforms of emissions trading scheme

The joint ministerial letter signed by Energy and Climate Change Ministers from the UK, Germany, the Netherlands, Sweden, Denmark, Slovenia, Luxembourg, Malta, and Norway calls for the introduction of a new Market Stability Reserve in 2017

Malta and eight other EU states, including the UK, Germany and France, have signed a letter calling on the European Union to deliver urgent reforms to the EU emissions trading scheme (ETS), in a bid to bring an end to the long-standing oversupply of emissions allowances in the market.

The joint ministerial letter signed by Energy and Climate Change Ministers from the UK, Germany, the Netherlands, Sweden, Denmark, Slovenia, Luxembourg, Malta, and Norway calls for the introduction of a new Market Stability Reserve in 2017 and not in 2021 as proposed by the EU commission.

Emissions trading is a market-based approach to controlling pollution. By creating tradeable pollution permits it attempts to add the profit motive as an incentive for good performance, unlike traditional environmental regulation based solely on the threat of penalties.

One of the problems with the current system is free handouts of permits to the biggest polluters and the purchase of “offsets” – carbon credits bought from outside the cap-and-trade system from carbon reduction projects in the developing world. The new Market Stability Reserve mechanism will address some of these problems.

 “While the ETS is clearly a very cost effective tool to decrease emissions of greenhouse gases some critical issues have to be urgently addressed,” Environment Minister Leo Brincat told MaltaToday.

According to Brincat the EU’s ETS market is not sufficiently flexible to help it adjust to demand. Brincat also called for a stronger market stability reserve which can ensure that the ETS delivers the low carbon investment at least cost.

At the October 2014 EU summit, EU leaders reached an agreement on the 2030 climate and energy package. They explicitly endorsed a Commission proposal relating to the «Market Stability Reserve» (MSR) but also agreed that extra free carbon allowances will continue to be granted after 2020 to those industries at risk of carbon leakage.

The current debate between EU decision-makers focuses on the date for the entry into force of the reserve. The UK, France and Germany all want the mechanism to start in 2017, but Poland is leading the opposition to an early implementation and no qualified majority prevails.

The letter signed by Malta and the other countries welcomes the European Commission’s recent proposals to introduce a new Market Stability Reserve (MSR) that would control the number of allowances in the market, but argues that the bloc cannot wait until 2021to launch the new mechanism, as currently proposed.

“By that time, the level of surplus in the EU ETS is likely to be significantly higher according to market analysts, with the resulting risk that critical low carbon investments needed this decade, are further postponed into the future, increasing decarbonisation costs and further undermining confidence in the system,” the open letter states. “We therefore call for the MSR to start in 2017.”

The letter also voices opposition to the current plan to return 800 million carbon allowances to the market before 2020, arguing that such an approach would result in “substantial market turbulence”, which would further undermine “investor and wider confidence in the EU ETS”.

“These allowances must either be put into the reserve or otherwise addressed to avoid damaging the credibility and stability of the EU ETS,” the letter states.

The letter effectively underlines long-standing opposition to the bloc’s current ETS reform proposals that has been led by UK Energy and Climate Change Secretary Ed Davey and his counterparts in Germany and Denmark.

However, a number of member states, predominantly from Eastern Europe, are reluctant to rush through the proposed reforms and cancel before 2020 the planned return of allowances to the market. They fear that the reforms proposed by the group of nine states would push up carbon prices and undermine the competitiveness of their heavy industry.

The latest letter attempts to address these concerns, setting out proposals for addressing the risk of “carbon leakage”, whereby companies relocate overseas in pursuit of lower carbon costs.

The letter argues the current measures for tackling the risk of carbon leakage through to 2020 by exempting some industries from carbon costs are sufficient. But it adds that the European Commission should accelerate efforts to explain how carbon intensive industries will be supported.

The latest proposals are likely to be welcomed by a host of green businesses, including many blue chip firms, which have consistently called for reforms to the ETS to be fast-tracked.

However, they are equally likely to face opposition from some industrial groups, which have countered that any changes to the scheme should be delayed until after 2020.