EU Proposes Carbon Market Concessions to Tame Energy Prices
(Bloomberg) -- The European Union proposed an adjustment to its carbon trading program to limit the impact of emissions costs on soaring energy bills, while stopping short of immediately releasing additional volumes into the market.
Energy prices are at the top of the bloc’s political agenda as concerns over its falling competitiveness compared to China and the US have been exacerbated by tensions in the Middle East. The European Commission offered to make supply controls in the EU Emissions Trading System more flexible, while keeping the mechanism’s key parameters unchanged.
The commission proposed scrapping the invalidation of certain permits in its Market Stability Reserve — a mechanism that controls supply in the carbon market — while leaving the volume thresholds and the absorption rate intact.
The MSR mechanism became a key feature of the ETS in 2019, when it started absorbing extra permits from the market if a certain threshold of allowances in circulation was met. The current legislation invalidates any allowances held in the reserve on Jan. 1 every year above the threshold of 400 million.
The measure effectively means the EU aims to limit carbon price volatility by boosting the number of permits it can keep in the reserve for potential future releases in case of any price swings. That is a less aggressive move than some traders had priced in following calls by politicians to significantly weaken, or even suspend, the EU ETS.
The EU will propose a regulation after Easter to update benchmarks that determine how many free allowances each industry receives, according to a senior EU official. The commission will also assess the parameters of the MSR, which remain unchanged under the current proposal, during a broader review of the EU ETS in July, the official said.
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