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How the political groups are aligned: An overview of ITRE committee amendments to the Market Stability Reserve proposal

An overview of the amendments tabled in the ITRE committee,[1] often a difficult venue for environmental concerns, reveals that the need for some form of Market Stability Reserve (MSR), which would correct for the imbalances in Europe’s carbon market, has been accepted by large swathes of the European Parliament. Instead of a repeat of the two-year trench warfare that beset the backloading decision, the battle lines seem rather to be drawn on the parameters of the reserve. The ITRE Committee will be voting on these amendments on the 22nd January 2015.

Prospects are good for the establishment of the MSR

Only one MEP, Cornelia Ernst, a German GUE/NGL MEP,[2] has spoken out against the MSR, altogether dismissing the carbon market as an inadequate instrument for implementing the EU’s climate ambitions. Amendments tabled by two Polish ECR Members, Marek Józef Gróbarczyk and Evžen Tošenovský, whose amendments would imply an upper activation threshold of the MSR of 3.3 billion tonnes, i.e. 50% above the current market surplus, also suggest hostility to the MSR, but this group is too small to count as a real threat. The same applies for the amendments tabled by a handful of Italian and French independents.

The overwhelming mainstream, however, shows a broad acceptance that an MSR should be introduced, and its design parameters should be close to those proposed by the Commission or even more progressive. The Greens occupy naturally the most progressive position, although they have successfully rallied the Italian Five Star movement to their cause. Furthermore, no dissenting amendments from within the ALDE Group were tabled against the relatively ambitious and interesting amendments proposed by ALDE MEPs Frederick Federley, Gerbert-Jan Gerbrandy and Morten Pedersen. The large S&D group similarly seems largely positive and progressive, although we will need to see which of the differing approaches survive any prioritisation process. Therefore, the crucial factor determining how ambitious the MSR will be is the question of where the conservative EPP group lands, as members of their group have tabled both progressive and regressive amendments.

Industry idyll by Till Krech

Photo "Reuter West" power plant seen from the Teufelsberg in Berlin, by Till Krech. Used under a Creative Commons licence.

Plenty of agreement to move beyond the Commission’s proposal

MSR start date: The Commission proposed an MSR starting in 2021, adjusting auctions downward by 12% when the market supply exceeds 833 Mt, and up by 100 Mt when the supply is below 400 Mt. While this proposal seems to form a solid centre around which centrist positions have started coalescing, plenty of MEPs have expressed preferences that go well beyond what has been initially proposed.

Of the 46 MEPs who have expressed their opinions regarding a start date for the MSR, either by tabling amendments or talking to Sandbag, only the more conservative EPP MEPs and two Italian S&D Members have opted for 2021, while the rest of the mainstream groups (progressive EPP submissions, ALDE, S&D, Greens, Five Stars) prefer an earlier date (2016 or 2017). Two Polish MEPs from the ECR group did suggest a 2023 start, but we think this is unlikely to garner much traction.

Thresholds and market adjustment: On the matter of thresholds triggering removal or addition of allowances to the market, distrust of numbers proposed by the Commission seems more widespread than expected. Although progressive EPP and more conservative S&D Members accept them, the Greens and their Five Star allies propose much lower values (600 Mt and 300 Mt), S&D newcomer Matina Werner has proposed an aggressive upper threshold (an implied value of 500 Mt), and ALDE stands united behind 600 Mt and 200 Mt.

Regarding the methodology of calculating the yearly adjustments made by the MSR in the case of a market surplus, many accept the Commission’s proposed 12%, including progressive EPP, ALDE, and the Italian S&D MEPs. However, more aggressive values have been proposed by others, among whom some S&D Members (20%), and the Greens and 5 Stars (25%). S&D do not yet appear to have a unifying position. There is also a divergence of opinion surrounding the adjustment trigger for adding allowances ( the Commission’s proposal is 100mt) – with the small 50 Mt proposed by the Five Star Movement and the massive 200 Mt proposed by the Polish ECR being the extremes that stand out.

Removing the backload and the unused free allowances: The most divisive question proves to be whether to remove the backloaded auction allowances and unused free allowances that stand to be released onto the market at the end of Phase 3. The Commission attempts to address this by creating an activation threshold at the end of each phase and distributing excess allowances into the next phase. The Greens, the Five Stars Movement, ALDE, and most S&D amendments have gone beyond this, proposing different mechanisms for of either cancelling or directly placing one or both pots of allowances into the MSR. Esther de Lange, from the Netherlands, stands out as the only EPP member to have expressed her interest in allowing the backload to be placed into the MSR.

Which way the EPP group vote may decide the final ITRE opinion

The only serious obstacle preventing the more progressive voices from moving beyond the Commission’s proposal is a sub-section of MEPs within the EPP, led by Antonio Tajani. A well coordinated political group, the EPP are still divided over the issue of a 2017 or 2021 start for the MSR, with thresholds either the same or somewhat looser than the Commission’s (1,000 Mt and 500 Mt), and a downward adjustment of either the same as the Commission (12%), or only 10%. However, it is good to see that there is general support for the Market Stability Reserve from all EPP Members. We can expect there will be some negotiating here as the EPP Group forms its final position; possibly involving concessions over carbon leakage issues, the introduction of more dynamic forms of allowance allocation, and compensation for the indirect costs imposed on manufacturers by the EU ETS.

This cluster of EPP MEPs led by Antonio Tajani, couching their demands in the language of the October Council conclusions, are asking that within half a year of adopting the MSR Decision the Commission review the ETS Directive. The review would cover carbon leakage, by providing the most efficient installations in sectors exposed to international competition with free allocation, making that allocation responsive to changes in production levels, and taking into account direct and indirect energy costs to industry. Tajani's group of EPP MEPs, along with ECR and S&D Members from Poland, also advocate for the removal of the cross-sectoral correction factor.

These demands bring the conservative EPP Members in direct conflict with the Greens, who have made it clear in their amendments how, since the MSR does not affect free allocation, they believe that no need exists to address carbon leakage through the MSR legislation. S&D is split on whether to address carbon leakage, dynamic allocation and indirect costs now or later. ALDE is silent on this issue, focusing only on the central proposal.

ERKI EP Colour

Photo of the European Parliament, Brussels, by erki. Used under a Creative Commons licence.

Battle lines

The emerging battle lines on the MSR file therefore will be drawn on the start date, the backload and unused allowances, set against issues such as dynamic free allocation, carbon leakage provisions, and accounting for indirect costs. – or at least making a commitment to deal with these issues under the 2030 package.

Other matters for debate: In addition to these fundamental matters, some Groups have expressed interest in a number of less central features of the MSR. Diminishing the response time of the MSR to only a single year lag has a surprisingly large number of supporters, especially among the conservative EPP Members. On the other hand, the Five Star Movement, the Greens, and ALDE would like to impose a ceiling on the number of allowances that the MSR could hold, by introducing an automatic retirement trigger. Again, the numbers and the mechanisms through which this provision is activated differ among the Groups. In the horse trading that will likely occur during the following weeks we would expect many of these features to be traded away.

Sandbag’s recommendations

The backload and the unused free allowances: Similarly to many of the amendments, Sandbag has identified the short term glut of allowances from the backload as a key problem destabilising the early functioning of the reserve. We also identify an equal threat from the second avalanche: the ‘unused free allowances’ left over from the New Entrants Reserve, partial-cessation and closure rules, and other unclaimed allowances.

We’re proposing amendments that deal with both of these threats and we will be pushing for unused allowances to be dealt with in ENVI committee amendments too. We think there’s a good argument for cancelling these combined allowances, around 1.7 billion, rather than immediately filling up the reserve. This would be broadly equivalent to raising the EU’s 2020 emissions reduction target to 25%, a vital international statement in advance of the Paris climate conference in December 2015. A 25% target would also align the EU with milestones in the Commission’s Low Carbon Roadmap, the same document from which the 40% 2030 target was derived.

Early start for the MSR: Sandbag has also been calling for an early start to the reserve, and the majority of the amendments have coalesced around a date we support, that of 2017. It's vital that a strong S&D vote comes out for this early-start, and that the majority of the EPP in ITRE are persuaded of the benefits. Without an early start, the deluge of allowances at the end of Phase 3 is likely to crash the ETS price to zero.

Better calibrated annual adjustments: Sandbag have also been calling for better calibrated annual adjustments, which take or return more allowances when the surplus is far from the threshold, but attenuate in annual volume as the threshold is approached. We’ve suggested annual adjustments of 33% of the surplus above the 833 Mt threshold, rather than the Commission’s 12%. Many of the amendments ask for this percentage to be changed, but very few agree, with percentages ranging from 6% to 33%.

We will now work to ensure that the strongest amendments get passed when ITRE votes at the end of January. Meanwhile, we’ll work with MEPs on the lead ENVI committee to make sure even stronger amendments are tabled next week (the 11th December). If a stronger MSR proposal can come out of this process, the ETS can be rescued from irrelevance, and return to contributing to the EU's low-carbon transition.

Footnotes

[1] ITRE: The Industry, Research and Energy Parliamentary Committee, who will give their final opinion on the Market Stability Reserve proposal at the end of January 2015.

[2] The political groups are EPP (centre-right), S&D (centre-left), ECR (right), ALDE (liberals), Greens (Green!), GUE/NGL (far-left), EFDD (far-right), NI (no group)

Correction

We originally wrote that Antonio Tajani's section of the EPP did not support removal of the CSCF. This was a mistake, as they do. We apologise for any confusion caused.

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