European Utilities Call for Quick Tightening of Carbon Market

Seven of the European Union’s leading energy producers called on policymakers to agree to an ambitious and fast reform of the world’s largest carbon market in a bid to help investors in the transition to climate neutrality.

Companies including Electricite de France SA, Statkraft AS and Fortum Oyj -- which have big nuclear and hydropower fleets -- want a special mechanism that controls oversupply in the EU’s Emissions Trading System to retain stricter parameters beyond 2023, according to a joint statement. They also want EU legislators to agree a faster pace of emissions-reductions in the carbon market from 2023.

The European Commission on July 14 is due to unveil the biggest reform to date of the ETS in order to align the cap-and-trade program with stricter climate targets for 2030. As part of the Green Deal, an ambitious strategy to reach net-zero emissions by 2050, the EU plans to reduce greenhouse gases by at least 55% by the end of this decade from 1990 levels. That compares with the existing 2030 goal of at least 40%.

“By implementing the ETS reforms early, policy makers can provide more market certainty and avoid putting a disproportionate burden on the last few years of the decade,” the utilities said. The statement was signed by chief executive officers of the companies, which also include Uniper SE, Enel SpA, ESB and Vattenfall AB.

The EU carbon market, started in 2005, currently covers around 12,000 installations owned by power producers, manufacturers and airlines by imposing pollution caps that shrink each year. The European Commission, the EU’s regulatory arm, is considering extending the system to shipping and creating an adjacent emissions-trading program for heating and road transport fuels as part of the reform.

That plan has already triggered criticism from many national governments, business organizations and environmental lobbies concerned about the risk of price hikes.

The utilities said the clean transition will require social acceptance and a more evenly spread decarbonization across all areas. That could involve the introduction of carbon pricing “step-by-step to all sectors” and later linking to the existing Emissions Trading System. The EU should focus on cost-efficiency, while mitigating the social effects on vulnerable groups, they said.

Here are some elements of the reform sought by the utilities:

  • The rate at which the ETS cap shrinks each year, known as the Linear Reduction Factor, should be increased from 2023, or by 2024 at the latest.
  • The 24% rate at which the Market Stability Reserve soaks in excess permits from the carbon market should be maintained beyond 2023.
  • The number of allowances held in the MSR should be limited to the equivalent of permits sold at auctions in the previous year; excess allowances should be invalidated.

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