EU ETS: Final talks on market reform bring no significant progress

Further talks on the future reform of the European emissions allowance market have brought only limited progress towards a final agreement. As reported by analytics website Platts, further progress in the talks can be expected in mid-September and subsequently at a meeting in October. Allowances are currently trading at around EUR 5.4.

Although reform of the European emissions market has been discussed for several years, few tangible results have been achieved. There is a surplus of allowances, which keeps their price low, and emissions producers are not sufficiently incentivised to invest in cleaner facilities.

Following the approval of the Market stability reserve, which is intended to stabilise the volume of available emissions allowances on the market, emitters are now focusing on talks on market reform after 2020. While the reform has been discussed internally since the second half of 2015, the European Council and the European Parliament only presented their positions this February.

Following yesterday's trilogue meeting, however, it is clear that further negotiations will be needed on the final form of the market, as the latest trilogue meeting brought minimal progress. According to Platts, the talks are too complex and the individual proposed changes are considerably interconnected.

None of the participants therefore wants to rush, and they first need to analyse the individual changes. This is also why only minimal progress has been made towards a final agreement.

The talks are complicated not only because the surplus of allowances on the market must be reduced while protecting vulnerable industrial sectors from the excessive financial burden associated with purchasing allowances, but also because of prepared changes that have not yet taken effect.

One such change is the already mentioned market stability reserve, which will take effect from January 2019. Another change affecting emissions could be the newly approved limits for pollutant emissions known as LCP BREF.

These relatively strict limits for emissions of NOx, SO2 and other substances may threaten the economic viability of operating some power plants, and their closure would again affect the volume of available allowances on the market.

With regard to the market stability reserve, discussion after 2020 is focused in particular on doubling the number of allowances placed in the stabilisation reserve. This proposal by the European Council and the European Parliament is intended to ensure an allowance price of EUR 35 by 2024. Under the Commission's proposal, by contrast, this price would not be reached until 2028.