EU Offers Carbon Market Concessions to Tame Energy Prices
(Bloomberg) -- The European Union proposed a limited adjustment to its carbon trading program to curb the impact of emissions costs on soaring energy bills, and pledged flexibility to avoid placing an excessive burden on industry during a transition to cleaner technologies.
Energy prices are at the top of the bloc’s political agenda as concerns over its declining 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 and floated concessions on free carbon permits for heavy industry.
In a draft regulation unveiled on Wednesday, 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 volume thresholds and the absorption rate intact. The proposal needs approval from member states and the European Parliament to enter into force.
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 price swings. This 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 MSR became a key feature of the ETS in 2019, when it began absorbing surplus permits from the market once a certain threshold of allowances in circulation was reached. Current legislation invalidates any allowances held in the reserve above a threshold of 400 million on Jan. 1 each year.
The design of the reserve will be assessed during a broader review of EU emissions trading law planned for July, according to a senior official who asked not to be identified. Revising more complex EU legislation can take up to two years.
In another move to address member states’ concerns about rising energy prices and the role of carbon costs, the Commission plans to offer some flexibility to energy-intensive industries on free emissions permits. While most allowances are sold at government auctions, certain companies receive a share of permits for free to prevent relocation to regions with laxer climate policies.
Launched in 2005, the EU ETS imposes gradually shrinking emissions caps on more than 10,000 facilities in sectors from steel to cement to chemicals. Carbon costs account for about 11% of electricity bills across the bloc on average, with heavy industry criticizing them as too much of a burden.
At the last EU summit in March, heads of government called on the Commission to take steps to reduce energy costs that were already stubbornly high before the Iran war disrupted oil and gas shipments and further boosted prices. Europe’s plans to revive its manufacturing sector and compete globally largely depend on whether it can lower energy bills for industry.
Shortly after the Easter break ending on April 6, the EU will unveil draft updated carbon-efficiency benchmarks that determine how many free allowances each industry receives, according to the official. The benchmarks will cover the period from 2026 to 2030 and, under EU law, must be tightened to reflect technological developments and improved performance.
Energy-intensive industries have called for freezing the benchmarks, fearing that tightening will place too much of a burden on manufacturers and lead to more factory closures. While the Commission has ruled out freezing them, it is examining what flexibility may be available to provide more generous allocations of free permits than initially anticipated, without compromising the integrity of the ETS, the official said.
The implementing act will first be subject to four weeks of public feedback, followed by a vote by representatives of EU member states in the bloc’s climate change committee, which the Commission expects to take place toward the end of April or in early May.
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