Will the Market Stability Reserve do the trick?
In February 2015 the European Parliament’s Environment Committee voted for reform of the European Union’s flagship Emission Trading System (ETS). To address the chronic problem of an oversupply of carbon allowances, and to signal that it is serious about fighting climate change, the committee approved a proposal to park millions of carbon allowances in a Market Stability Reserve (MSR), starting on 31 December 2018.
The start date at the end of 2018 is itself a compromise between an early start in 2017 supported by Germany, the UK and Europe’s power sector and a later date of 2021 favoured by Poland , Lithuania, Cyprus and former east-European communist states.
However, all are agreed that the current carbon price of around
|'The current carbon prices provide virtually no incentive to switch away from coal and decarbonise|
The impact of the Market Stability Reserve on energy consumption and behaviour is inevitably going to be incremental rather than big bang. As Murray notes, 'The one thing that is for certain it is aimed at increasing the carbon price. It should gradually encourage low- hanging fruit solutions such as the switch away from coal to gas and potentially investment in low-carbon technologies to be brought forward'. Certainly, if nothing had been done to reform the ETS, its effectiveness as a driver to encourage energy efficiency and investment in decarbonisation, would continue to have little impact. The transfer of surplus carbon allowances alongside the 900 million 'back loaded' allowances into the MSR pool together with annual auctions should balance supply and demand and introduce flexibility to respond to market conditions more promptly. As Barnaby Wharton, senior policy adviser, CBI Brussels confirms, 'It should give the ETS an ability to better respond to economic developments and reduce volatility in the system'. Moreover he adds, 'It should provide greater predictability and transparency in the market, since stakeholders will know exactly how much has been removed or returned to the market by auction in any given year'.
However, there is no certainty as to how effective the MSR will prove in practice since it is based on current conditions and projections and 'this has resulted in the European Commission deciding to review the parameters of the operational market reserve parameters at the start of each phase', suggests Stuart Murray. In hindsight, if the Market Stability Reserve had been produced at the start of Phase 2 (2008-2012) of the ETS, it would have been better able to manage the effects of the economic downturn and the over-allocation of allowances in previously years. Instead, the recent financial crisis and subsequent economic recession caused carbon prices to fall from a peak of €30 per tonne in 2008 to just €7 per tonne at the end of February 2015.
Opposition to MSR
The proposal for the MSR and the start date of 2018 has yet to be approved. Agreement still needs to be given by Plenary of the European Parliament, as well as a qualified majority at the of EU Council of Ministers, which is expected by July 2015. Despite significant opposition, Kelly Brown, Corporate PR, RWE Generation, remains optimistic acknowledging that 'While there is a risk of a blocking minority, if just a few additional member states came on board on an early MSR start, a majority could be secured.'
Poland leads the opposition, which includes Cyprus, Bulgaria, Croatia, Czech Republic, Hungary, Lithuania, Romania, as well as energy intensive high carbon emitting industries,
|Poland’s opposition could be weakening|
Nevertheless, Poland’s opposition could be weakening. More than half of Polish power stations are over 25 years old and a quarter more than 30 years old. These ageing power stations are due for replacement. Polish dependence on Russian coal and the need to build replacement power stations presents both the opportunity as well as an urgent need to diversify away from coal power.
Impact on investment and innovation.
A report by the LSE’s Grantham Research Institute on Climate Change and the Environment, February 2015 finds that delaying the MSR until 2021 'risks undermining investment in clean technology'. Therefore, the proposed early start is good news as it brings some certainty to energy businesses.
|given the scale of the challenge, it is unlikely to be sufficient|
Nevertheless, will it work and is this reform sufficient to spur investment and innovation? 'To support the efforts of the energy sector to cut emissions, the EU needs a cohesive strategy to develop innovative solutions as well' states Wharton. Theoretically, the introduction of the MSR should contribute to the drive for greater energy efficiency and innovation but it is difficult to be sure since factors like the oil price, national renewable policies and the cost of subsidies for renewables complicate matters. As Bloomberg, the financial news service pointed out on 16 February 2015, the rise in renewables has 'suppressed carbon prices […]. The carbon market is being undercut by a patchwork of national subsidies for renewables'. It is hard to avoid the conclusion that the ETS, even with the MSR, is a necessary but insufficient tool, to get the significant carbon emission reductions required in the race to limit climate change. More policies and support across the energy sector, in infrastructure, for example, will be needed to stimulate the significant investment needed.
Prospects for a global ETS
BP’s Energy Outlook, February 2015 predicts an increase in demand for energy of 40 per cent by 2035 leading to a 25 per cent increase in carbon emissions - well above the level required to provide a chance of stabilising global temperatures at 2 per cent above pre-industrial levels. 'A meaningful global carbon price would provide the right incentives for the most cost-effective decisions and investments to be made', claims the report.
|Merging the existing 40 carbon trading schemes around the world would face numerous challenges|