Czech Republic to seek to soften EU ETS II system that it itself helped push through

Prime Minister Petr Fiala and Petr Hladík, Minister of the Environment, announced jointly at a press conference this week that the Czech Republic will seek changes to the conditions and a postponement of the full launch of the second emissions trading system (EU ETS II). Its introduction was approved in December 2022 during the Czech Presidency of the Council of the EU. At the time, government representatives regarded reaching an agreement on changes to the emissions trading system as a huge success of the Czech Presidency.

The Czech Republic will seek changes to the conditions and a postponement of the full launch of the EU ETS II system. The system is to apply to the heating sector and the road transport sector. Its full launch is currently planned for 2027, although under the agreed conditions it may be postponed by one year in the event of extreme energy prices. The monitoring phase for collecting data on the volume of emissions under the second system will begin as early as next year.

It is important to note that allowances will not be surrendered by end consumers, but by fuel suppliers. They will, of course, pass the related costs on to end customers. We wrote more about the December 2022 revision of the allowances market here.

The Czech Republic will also seek changes to the system's conditions in order, in Minister Hladík's words, to achieve “a simplification, greater transparency and clarification of how these emissions allowances will be traded”, given the wide range of estimated allowance prices. We wrote about estimates of allowance prices in the second system here.

The unpredictability of emissions allowance prices is a major issue, although this should no longer come as a surprise. Even the Market Stability Reserve (MSR) system currently does not prevent greater price volatility, particularly in light of the crises of recent years (COVID, Russia's aggression against Ukraine), which have affected economic activity, energy demand and the volume of emissions released. The operating principle of the MSR in the first EU ETS system is described here. Under the second system, EU ETS II, additional allowances could be released onto the market if the allowance price reached 45 EUR. However, this alone does not mean that the allowance price would not subsequently rise above this threshold again.

"The Green Deal needs to be revised. We need to make the achievement of climate targets more realistic so that it does not stifle economic growth or have a negative impact on citizens and businesses, but instead enables us to keep Europe competitive," Petr Fiala said this week regarding the European emissions trading system.

However, the principle of emissions trading systems is to disadvantage fossil fuel-burning sources in favour of cleaner sources. The higher the allowance price, the more cleaner sources will be favoured and the greater their expansion will be. But this cannot be achieved without certain investments, or rather a financial impact on citizens and businesses.

At the time the second emissions trading system was adopted, reaching an agreement on the system's current form was seen by the government as a major success. The work of the Czech Presidency on environmental protection was also praised at the time by Frans Timmermans, Vice-President of the European Commission.

"From the outset, we wanted to finalise a balanced agreement on changes to the emissions trading system and the Social Climate Fund during our Presidency. The fact that we succeeded is a huge achievement. It will enable us to meet climate targets in key economic sectors while ensuring that the most vulnerable households and small businesses are effectively supported in the transition to the new climate policy," the then Minister of the Environment, Marian Jurečka (KDU-ČSL), said regarding the agreement reached in December 2022.