New negotiating positions risk losing the 450gCO2/kWh emission limit on the funds
In the latest round of trilogue discussions, we are very concerned that backsliding will lead to a much weaker ETS reform than was agreed in either the Parliament or Council positions. Specifically, this relates to how the Article 10c derogation and Article 10d could be opened to fund unintended high-carbon investments, such as refurbishing old power plants.
First, the number of permits available for funds to support to power investments, which could include coal, could almost double 931MT to 1760MT across the next phase. At €20/t, the value of these funds would increase from €18 billion to €35 billion, which means this the increase could be a staggering €17 billion.
About one-third of this seems to have already agreed, with changes in Article 10c. But two-thirds of this relates to discussions in increasing the Modernisation Fund (Article 10d). At €20/t, this would increase the value of the Modernisation Fund from €6 billion to €18 billion. For Poland alone, the Modernisation Fund alone would be worth €8 billion, if the increase was approved.
The increase is because of proposed changes in both Article 10c and 10d.
- Article 10c: Provisional discussions would allow countries with a GDP per capita below the EU average to increase the number of allowances they can freely allocate to power installations under this derogation from 40% of their auction share to 60% of their auction share. This is capped by the solidarity fund, which also interacts with the Article 10d, so in many countries it is actually less than the 50% increase from 40% to 60%..
- Article 10d: There is an expectation that the Modernisation Fund, Article 10d, will double from 2% of all ETS permits to 4%. However, this actually leads to more than a doubling of allowances, because of how it interacts with the solidarity fund.
Second, we now risk a backsliding in how those permits can be used. The Parliament position going into the trialogues added a carbon intensity threshold of 450gCO2/kWh for both Article 10c and 10d. Although Council didn’t include it in its general approach, many members states emphasized the need to include stricter environmental criteria such as a carbon intensity threshold for Article 10c and 10d use.
The latest discussions, which were only referring to Article 10c, were not promising. They say:
“On Article 10c, the concerned Member States can only support investments to power generation with a level of emissions intensity that is below the average [plant?] electricity emissions intensity in the preceding three years and requiring any increase in generating capacity to be matched with decommissioning of existing capacity”
This means that Article 10c allowances could be used to refurbish coal plants, so long as that money is, in part, used to increase efficiency – which could be things like sharpening the turbine blades or increasing the pressure in the boiler. It would also allow new units to be built, if an existing unit was decommissioned.
We understand that the 450g safeguard on the Article 10d Modernisation Fund is also at risk of being negotiated out of the final reform agreement. The combined effect of increasing funds which could be available to investments into high carbon emitting plants and the absence of a carbon intensity criteria would go directly against the goals enshrined under the Paris Agreement.
Whilst there are many parts to these negotiations, there has been no increase in ambition elsewhere in the trialogues such as a Paris-style ratchet, adjusting the ETS to reflect real emissions levels. The absence of the most obvious bridge to the link the ETS to the Paris Agreement speaks loudly of the EU’s faltering commitment to climate leadership.
Trialogue must at a minimum maintain the 450gCO2/kWh limit for the funds. It simply is not acceptable that this reform, post-Paris Agreement, results in a doubling of money available to keep coal online, whilst failing to tackle the allowance surplus that will suppress the EU carbon price for the foreseeable future.