posted by Damien on 20th Oct 2014
As European leaders prepare to meet this Thursday to agree a new climate and energy package, the UK government has published a new position paper on the EU Emissions Trading Scheme that calls for the most aggressive and urgent reforms so far tabled by any EU Member State.
For several years, the carbon price in the EU emissions trading scheme has been severely depressed as the result of a protracted surplus of carbon allowances in the market. To address this, the European Commission has recently proposed new legislation for a “Market Stability Reserve” that regulates the supply of allowances released into the market so as to prevent temporary gluts or bottlenecks of supply from causing crashes or spikes in the carbon price. 
The UK position paper published today warns that the surplus on the carbon market is likely to grow significantly higher than the Commission expects, reaching 3.1 billion by 2020 instead of the 2.6 billion the Commission forecasts. Moreover, the UK paper emphasises that the weak ambition of the current 2020 climate target (20% below 1990 levels) is part of the reason that this surplus has accumulated, noting that it is not aligned with the cost-effective delivery of Europe's commitment to cut emissions 80-95% below 1990 levels by 2050.
To address this growing surplus, the UK has proposed some of the most aggressive reforms to the Market Stability Reserve legislation yet published by any EU member state. The government argues that the mechanism proposed by the Commission needs to be improved by starting earlier (in 2017 rather than 2021) and by withholding or even cancelling hundreds of millions of allowances due to flood the oversupplied market in 2019 and 2020. In addition, it has proposed further safeguards to prevent allowances removed from flowing back into the market too readily.
Damien Morris, Sandbag’s Head of Policy commented:
“This is a very welcome intervention from the UK government. Heads of State are due to agree a 2030 climate and energy framework this Thursday in which the ETS is set to remain a central plank, but it will be a broken plank if the growing surplus of ETS allowances is not urgently addressed. Our latest analysis strongly supports the UK government’s conclusion that a more immediate and aggressive fix to the scheme is desperately needed if the ETS is to deliver the cost-effective emissions reductions that were promised."
A new report published by Sandbag last week found that the current 2.1 billion surplus of allowances in the EU carbon market could climb as high as 4.5 billion by 2020 if left unaddressed. Their report also calls for the Market Stability Reserve to start in 2017 and for allowances scheduled to return to the market in 2019 and 2020 to be withheld and preferably cancelled. 
Notes for editors
The UK position is published here: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/364992/UK_MSR_position_gov.uk.pdf
The original legislative proposal from the European Commission was published on January 22nd 2014: http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52014PC0020
 The Commission forecast is published in its Impact Assessment for the Market Stability Reserve: http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52014SC0017
Sandbag’s report “Slaying the Dragon” was published on Wednesday October 15th 2014 http://www.sandbag.org.uk/site_media/pdfs/reports/Sandbag-ETS2014-SlayingTheDragon.pdf
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