Nearly a year on since the release of the Commission’s post-2020 EU ETS reform proposals – where have we got to?

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Later this month at the Environment Council meeting, Ministers from across the EU will convene in Luxembourg to discuss, debate and start deciding on how the EU Emissions Trading System (EU ETS) will operate from 2021 to 2030 - also known as Phase IV.

Since the European Commission published its reform proposals in July last year, guided by the European Council’s conclusions of October 2014, the Paris Agreement has been adopted, signed and entry into force looks on its way. 

There have also been a steady stream of non-papers released by Member States designed to further the discussion on a number of important issues to improve on the system proposed by the Commission. 

The French have put forward the idea of a carbon price corridor, the Austrians have pushed for simplifying the compliance cycle, the Belgians have questioned the free allocation / auctioning split and the UK has led debate on the need for a greater level of tiering, to name but a few.  Meanwhile, everyone with skin in the game awaits for the Germans to make their position clear which will be crucial to how the Council approaches the reform proposals.  

It will be the Dutch, as the current holder of the EU’s rotating presidency, who have to make sense of all this and chart a path of progress at the meeting before handing over the reins to the Slovaks in July.   

In parallel to this, the European Parliament led by the Environment and Industry Committees who have shared responsibility on key aspects of the reforms are continuing to thrash out their final positions.  Seeking a compromise amongst all the political groupings in the Parliament will be no mean feat.

Front and centre for many involved will be how to reform a system plagued by a low and often volatile carbon price which has not provided a clear market signal to drive significant low-carbon investment. 

This will need to be balanced against ensuring that those sectors at real risk of carbon and investment leakage are not only adequately protected but are supported and best equipped to undertake the major transformation that our climate goals demand.  The design, shape and size of the proposed Innovation Fund will be critical in this respect.    

Of course, not all the ills of the system can be remedied during this reform process alone.  As part of a much wider climate policy framework, the EU ETS continues to be the victim of friendly fire from the EU Renewable Energy Directive and other competing policies which have weakened its ability to do its stated job.   

Make no mistake though.  The eventual outcome of these negotiations, which are likely to run on for another year, will help determine whether the EU ETS can be the poster boy of cap and trade systems around the world for the right reasons, not the wrong ones.

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Senior Climate & Energy Adviser

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