Britain targets 2017 for start of European carbon market reforms

By Ben Garside

LONDON (Reuters) - Britain wants reforms to Europe's Emissions Trading System (ETS) to start from 2017, four years earlier than proposed, hoping to tackle the scheme's massive oversupply and boost investment in clean technologies.

The European Commission has said it wants the so-called market stability reserve (MSR), which will set aside hundreds of millions of surplus carbon allowances from the ETS to help firms cope with economic shocks, to come into force from 2021.

Siding with an earlier view from Germany, the British government said on Monday the date should be brought forward.

It also called for 900 million carbon allowances from a more limited backloading reform programme to be cancelled or inserted directly into the reserve.

"The UK supports an MSR that is strengthened and introduced earlier so it can fully tackle the damaging surplus, provide a credible, stable low carbon investment signal and ensure Europe can meet its emissions reduction obligations more cost effectively," the government statement said.

It added that it wanted changes to the proposal to "ensure allowances are retained in the reserve under ‘business as usual circumstances’, so they remain available to provide protection against insufficient liquidity and prices rising too quickly".

The EU ETS, the world's biggest carbon market, regulates around half of Europe's greenhouse gas output by forcing over 12,000 power plants, factories and airlines to surrender an allowance for every tonne they emit.

A majority of EU states and the bloc's parliament must agree for the proposal to be made law. Coal-dependent Poland opposes the measure but few other countries have taken sides.

Progress on the bill is closely watched by carbon market participants as analysts say the reserve could add around 11 euros to carbon prices .


Britain's statement showed the government expects the market's allowance surplus to top 3.1 billion by 2020, more than 50 percent above the annual ETS allowance cap and well above the Commission's projected 2020 surplus of 2.6 billion.

The Commission proposal calls for the withdrawal of 12 percent of the surplus a year and would not be eliminated until 2028, according to the British statement.

"If the surplus is set to get bigger, it means it will take even longer for the MSR as proposed by the Commission to take effect," said Damien Morris of environmental campaign group Sandbag.

Sandbag expects the surplus to reach as much as 4.5 billion tonnes in 2020, mainly because of the effect that energy efficiency regulations will have on lowering demand for electricity, the biggest single source of emissions.

European business groups are sharply divided over the reform, with some groups keen for an early start to provide more certain investment conditions.

Other companies fear the changes will mean they lose out to foreign competitors without first getting guarantees they will continue to get free allowances to shield them from much of the added cost.

"Instead of rushing to bring it in early, we need take a step back and review the whole post-2020 ETS," said Gareth Stace of the British manufacturers' association EEF.

"Introducing the MSR early not only puts sectors like steel at unnecessary risk, but also limits our options for a more thorough review of the system," he said.

(Editing by David Goodman, Susan Thomas and Crispian Balmer)