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EU aims for 40% carbon reduction target

Market stability reserve to push carbon prices up by €12

• EU proposes a 40% reduction target for 2030, indicating its willingness to position itself as a leader in the process towards establishing a new global climate deal.
• The EU emissions trading scheme (EU ETS) to take central stage in driving carbon reductions and renewable energy in Europe.
• A market stability reserve should deal with the oversupply of allowances and create a steadily increasing carbon price averaging €35 between 2019 and 2030, boosting the carbon price by around €12 compared to business as usual.

Oslo (22 January 2014)

Today, the European Commission presented a package of proposals designed to set the long-term framework for the EU’s climate and energy policy and boost carbon prices. The package includes a proposal for binding targets of a 40% reduction of greenhouse gas emissions and a share of at least 27% of renewables in energy consumption by 2030. In addition, the Commission has put forward a legal proposal for a new market stability reserve to deal with the huge oversupply of allowances in the EU carbon market and ensure more stable carbon prices in the future.

“The proposals tabled by the European Commission will kick off a process that will shape the EU’s climate and energy policy towards 2030”, according to Thomson Reuters Point Carbon, the leading provider of market intelligence, news, analysis and forecasting for the energy and environmental markets.

The proposed 40% climate target is at the higher end of expectations. If confirmed by the member states by the end of this year, the EU will likely use this relatively ambitious target to put pressure on other countries in the international climate talks. “If member states support a 40% reduction target this year it would position the EU to play a leading role in the process towards a new global climate deal to be adopted by the end of 2015. However, it won’t be easy to get all EU countries to sign up to this target. The European Council in March may well see an exchange of views rather than an adoption of a final EU position”, said Hæge Fjellheim, a senior analyst at Thomson Reuters Point Carbon.

Current EU legislation sets binding targets both for emissions reductions and the share of energy consumed from renewable sources in each member state for 2020. In the proposed framework for 2030, the European Commission wants an overall EU-wide target for the share of energy consumption from renewable energy, while it has not proposed binding targets for each member state.

“The European Commission seems to be strengthening the role of its emissions trading scheme as the most important instrument to achieve the overall climate and renewable energy targets. The proposed target on renewable energy consumption is at the lower end of expectations and marks a shift away from the current policy of setting targets for each member state. This could be a game-changer for investors in renewable energy, who will have to rely increasingly on the carbon price signal rather than on national support schemes,” said Marcus Ferdinand, head of EU carbon analysis at Thomson Reuters Point Carbon.

In terms of legislative initiatives, the most significant element in the package is a proposal to set up a market stability reserve in the EU ETS. The basic idea is to address the accumulated oversupply of allowances in the EU ETS and prevent the market from building up oversupply in the future. The proposal is intended to complement the backloading decision, which is a short-term fix, as the market stability reserve would introduce a more structural measure to address the oversupply of allowances in the longer term. Starting in 2021, 12% of the accumulated oversupply would be transferred to the stability reserve each year unless the oversupply falls below 833 million allowances. In addition, some of the backloaded allowances would be transferred from phase 3 (2013-20) to phase 4 (2021-28) of the EU ETS – “a further backloading of the backloaded volume”, Ferdinand explained.

“The market stability reserve combines the idea of adapting the market to deal with external shocks and the idea of postponing the re-introduction of the backloaded volume. Our analysis indicates that at least 400 million allowances would be moved from phase 3 to phase 4 of the EU ETS as a result. The transfer of allowances to the reserve would take place over several years and by 2030 we estimate that 700 million allowances would be held in the reserve,” according to Ferdinand.

“If this proposal is adopted it would significantly lift the carbon price, starting from the end of phase 3 and resulting in an average price of €35 between 2019 and 2030 as the market responds to the withdrawal of allowances. This is on average €12 higher than it would otherwise be, without the proposed reserve. According to our analysis, the reserve would continue to grow until 2025 when the accumulated oversupply in the EU ETS would reach the lower threshold in the proposed legislation. From 2026, 100 million allowances would be released from the reserve each year thus softening the price spikes towards 2030 and beyond”, explained Ferdinand.

Note to editors
• The Kyoto Protocol to the UN Framework Convention on Climate Change entered into force in February 2005. The Kyoto Protocol spurred the creation of the “flexible mechanisms” (CDM and JI) that were designed to incentivize emission abatement investments such as renewable energy in developing countries, and to allow western governments and companies to finance such projects in lieu of cutting their own emissions. The Kyoto Protocol also motivated the launch of the EU Emissions Trading Scheme (ETS) in 2005.
• The world’s most important international emissions trading scheme, the EU ETS works on a cap-and-trade basis, where the total volume of permitted emissions (the “cap”) is set at the start of a trading period. EU Allowances (EUAs) are the tradable units under the EU ETS, each representing a permit to emit one metric tonne of carbon dioxide equivalent (CO2e). Up to a certain limit, companies regulated by the EU ETS are also allowed to use carbon credits from third countries (CERs and ERUs) instead of EUAs.
• The second phase of the EU ETS ran from 2008-12, the third phase runs from 2013-20 while phase 4 is scheduled to run from 2021-28.
• Backloading is the temporarily withholding of emission allowances that were originally due to come to market between 2014-2016.The European Commission has proposed this as a short-term solution to the oversupply in the market. Whether it lies within the Commission’s prerogative to effectuate such an intervention was discussed in the European institutions throughout 2013, before it was finally confirmed in December. It is now expected to be implemented before the summer 2014.

To see a copy of the report, arrange an interview with the analyst, or if you have any questions, please contact:

Candida Jones
PR Manager, Thomson Reuters Point Carbon
Mob: +44 (0) 777 5754 763
E-mail: candida.jones@thomsonreuters.com

Jake Hemingway
PR Specialist, Thomson Reuters Point Carbon
Phone: +44 (0) 7542 5204
E-mail: jake.hemingway@thomsonreuters.com

Marcus Ferdinand
Head of EU carbon analysis, Thomson Reuters Point Carbon
Mob: +47 908 12 506
E-mail: marcus.ferdinand@thomsonreuters.com

Hæge Fjellheim
Senior Analyst, Thomson Reuters Point Carbon
Mobile: + 47934 19 427
Email: hege.fjellheim@thomsonreuters.com