Germany Puts Industry at Core of EU Carbon Market Reform
(Bloomberg) -- Germany wants the European Union to place industrial transition to cleaner energy at the heart of a planned review of its carbon market, after rising power and fuel prices prompted criticism of the bloc’s key climate tool.
In July, the European Commission is due to propose changes that adjust the EU Emissions Trading System to a new goal of reducing greenhouse gases by 90% by 2040 from 1990 levels. Berlin wants targeted amendments to the cap-and-trade carbon program to strengthen the bloc’s competitiveness and safeguard its industrial base, according to a document seen by Bloomberg News.
That includes a revision of benchmarks, which determine how many free allowances each industry receives and a slower pace of emissions cuts in the carbon program to prevent price spikes in the 2030s. At the same time, Germany is backing industry through a prolonged phaseout of free allowances, which allow certain sectors to emit CO2 without paying for the right to do so.
On the other hand, the EU must avoid policies that “misinterpret” the so-called ETS1 market as a short-term way to lower power prices, endangering its core task of stimulating investment in clean energy, according to Germany. Benchmark carbon contracts dropped to the lowest in almost a year last month on concerns that politicians will seek to weaken the market after the Iran war pushed up energy prices.
“To ensure reliability and the achievement of our climate targets, ETS must continue to ensure that decarbonization frontrunners are not disadvantaged, provide planning certainty for market participants, and thereby incentivize innovation and long-term investment,” Germany said in the document.
Started in 2005, the ETS1 program imposes shrinking pollution caps on power utilities, manufacturers in sectors from steel to chemicals as well as airlines and shipping. Carbon costs account for about 11% of electricity bills across the bloc on average, with countries reliant on fossil fuels facing a bigger burden.
The EU carbon market has been criticized in recent months by energy-intensive sectors and some governments for adding to the burden of high energy prices on consumers and industry. In February, Germany’s Chancellor Friedrich Merz said the EU should be open to revising, or even postponing, the ETS — causing carbon prices to tumble. He later walked back those comments.
The commission already proposed addressing the carbon component of power prices through a fast-track fix to a special reserve in the ETS that removes excess emission permits from circulation and can release them at times of price shocks to stabilize the market.
The plan is to make the so-called Market Stability Reserve more powerful by scrapping a provision that invalidates any allowances held in the reserve above a threshold of 400 million on Jan. 1 each year. That would give the EU more permits to intervene in the future.
The proposal can be a “sensible step” but must also fit an overall concept of reforming the ETS, according to Germany, which also warned against weakening the reserve. As part of the overhaul in July, the reserve should be adjusted to strengthen the system flexibility and reduce price risks, Berlin said.
In addition, the EU should improve protection of its producers under the Carbon Border Adjustment Mechanism, which was introduced to prevent relocation of companies to regions with laxer climate rules.
Germany also wants the integration of permanent negative emissions from technologies such as direct air capture to offset hard-to-abate pollution and consideration of imported carbon credits to ensure a safety net, according to the document. The latter could be used for the Market Stability Reserve, Germany suggested, echoing calls by some companies for the EU to allow international credits in the ETS to boost the firepower of the reserve in case of intervention.
“ETS1 will continue to function as an anchor in light of current economic and international challenges if we focus on its core function: achieving climate targets, and providing stability, reliability, and long-term planning certainty,” Germany said in the document. “Strengthening its reliability must be central.”
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