The European Union has agreed a deal to start reforming the Emissions Trading System (ETS) from 2019.
The EU ETS works as a ‘cap and trade’ system and is designed to cut pollution by making businesses pay for producing too many greenhouse gas emissions.
Since 2009, a surplus of emission allowances have been built up in the system, reaching around 2.1 billion in 2013, weakening the carbon price.
Representatives from EU member states, the European Parliament and the European Commission have set out a draft law to start operating the so-called Market Stability Reserve (MSR) two years earlier than was originally proposed.
The proposed law would create a system that automatically takes a portion of ETS allowances off the market and into the reserve if the surplus exceeds a certain threshold. In the opposite scenario, allowances could be returned to the market.
That’s expected to help reduce some of the glut of permits and push up demand and prices.
The “backloaded” allowances – around 900 million of which was postponed from 2014-2016 to 2019-2020 – will be placed on the MSR and unallocated allowances will be transferred directly to the market reserve in 2020.
Belgium MEP Ivo Belet, who is steering the legislation through Parliament said: “We have struck a good balance between an ambitious and effective reform of the ETS and strong guarantees to ensure that Europe’s energy-intensive industries are not obliged to move their production facilities to countries s outside the EU with less stringent climate policies.
“The Market Stability Reserve is an efficient, market-driven tool that will stabilise our ETS system, the central pillar of Europe’s sustainability and climate policy.”