The European Parliament voted in favour of a much-needed reform to the EU Emission Trading Scheme (ETS) and new rules to guard against indirect land-use change (ILUC) from biofuels on Tuesday, opening the door to deals with member states on both files before the summer.
Two of the most controversial files in Brussels took a leap forward on Tuesday, when the European Parliament voted in favour of opening negotiations with member states on a supply-side fix to the EU Emission Trading Scheme (ETS) and on limiting greenhouse gas emissions from indirect land-use change (ILUC) from biofuels. The Latvian EU presidency will now try to broker a deal between MEPs and Member States by as early as spring.
Two key results from the EU ETS vote
MEPs voted in favour of establishing a so-called “market stability reserve” (MSR) in 2018, with it to become operational “by 31 December 2018”. The European Commission had proposed 2021.
The MSR will mandate officials to add and remove carbon allowances from the market according to pre-set rules, to render the scheme more resilient to economic changes and the effects of other policies to promote renewables and energy efficiency.
Its start date was one of the most fought over points ahead of the vote. Greener-leaning MEPs wanted it to start in 2017. A group of member states including Germany, France and the UK also wants 2017 (although the Council of Ministers has not formally adopted a position yet). The European Commission itself had originally proposed 2021.
Going operational by the end of 2018 – or in reality, 2019 – was welcomed as a reasonable compromise by some, while others want to continue the fight for 2017. “If this date is confirmed by Council, the current oversupply will only be eliminated around 2023 – eight years from now,” said Hans ten Berge, Secretary General at Eurelectric.
How did the carbon market react?
The carbon price rose nearly 5% on the eve of the vote, reported Reuters, closing at a two-year high of €7.80. It climbed a little further before actually slipping back down to €7.60 on Tuesday. Market analyst Thomson Reuters Point Carbon said MEPs had voted for a €5 higher carbon price up to 2020 than under the Commission’s original plans. “If the mechanism would be implemented as decided today, we see European carbon prices reaching €17 a tonne in 2020, rising to €29 a tonne in 2030,” said Marcus Ferdinand, head of Point Carbon’s EU ETS analysis.
The second most important outcome of the vote was the decision to transfer 900 million allowances already taken out of the market as an emergency fix, straight into the new reserve. Otherwise, these would automatically have returned to the market from 2019 – and triggered another price crash.
MEPs also decided to transfer an estimated 750 million thus far unallocated allowances – set aside for new entrants and arising from plants closures – straight into the new reserve.
In total, this means that some 1.7 billion allowances normally destined to enter the EU carbon market would not do so. In practice, this would avoid a near doubling of the existing surplus of over 2 billion allowances by 2020 (to put this into context, the existing surplus is already equivalent to one year’s worth of EU ETS emissions).
“This is a game changer. These amendments represent a massive improvement on the Commission proposal. If the Council of Ministers backs these reforms, the effect on the supply of carbon could dwarf that of Europe’s 40% climate target in the near term. The new climate target translates to around half a billion tonnes less supply in the ETS between now and 2030. The Market Stability Reserve could reduce supply by 2 billion tonnes or more.” – UK-based NGO Sandbag
MEPs also decided that 300 million of the thus far unallocated allowances will be sold on the market between the date the MSR becomes operational and 2025. The proceeds will fund “breakthrough industrial innovation projects”. In another concession to energy-intensive industries, MEPs reiterated the need for a fresh look at carbon leakage risk for 2030.
The MSR is to be reviewed “within three years” after it starts operation – this is a little faster than the 5-year review originally proposed by the Commission.
Finally, in a little noticed amendment, MEPs also agreed that at least half of all the revenues member states get from selling carbon allowances must go to climate-related initiatives. This earmarking was voluntary until now, although in practice the vast bulk of these revenues have indeed been spent on climate action (87% the Commission calculated in October).
Most EU ETS stakeholders welcomed the outcome of Tuesday’s vote as a strong political signal that the scheme is here to stay and will be fixed. The Commission has said it will issue further legislative reforms – with carbon leakage compensation set to be the most controversial issue – as soon as the MSR is agreed. For now, Member States need to agree their position to enable negotiations to begin with the European Parliament. The two sides are unlikely to be very far apart.
ILUC vote secures a future for advanced biofuels
The most significant aspect of the ILUC vote is that it moves this very long-standing file closer to resolution. Crucially, the European Parliament’s environment committee gave rapporteur MEP Nils Torvalds a clear mandate to start negotiations with Member States – his predecessor Corinne Lepage failed to win this last year. Negotiations are due to start on 9 March, according to Oxfam. Unlike on the MSR however, here the Parliament and Member States are far apart on the key issues. The European biodiesel industry has the most to lose.
MEPs do not want land-based biofuels to exceed 6% of final energy consumption in transport by 2020. Significantly, they explicitly include energy crops under this cap. This sets them up for a full-on confrontation with a blocking minority of Member States that has refused to go below 7% (for food crops only). These numbers should be seen as sub-targets to an existing EU target for 10% renewables in transport by 2020.
“This decision correctly identifies land use, not the type of crop, as the key environmental challenge of biofuels. It would mean that Member States could not subsidise or mandate this type of biofuel after 2020. EU Member States spent €6 billion in 2011 on supporting a 4.5% share [of land-based biofuels].” – T&E, a green transport NGO
Where Member States have shied away from mandatory ILUC reporting, MEPs now suggest that ILUC factors – feedstock-specific carbon footprints – should be included in all relevant legislation from 2020. Fuel suppliers must start reporting on the estimated ILUC emissions of any biofuels they use right away and this will count towards their emissions targets after 2020. MEPs want the Commission to continue setting emission reduction targets for fuel suppliers through the fuel quality directive out to 2030.
Advanced biofuels (usually made from wastes and residues) should count for at least 1.25 percentage points of the 10% target in 2020, MEPs say. This is less than the 2.5% recommended by Torvalds, but much more than the voluntary approach preferred by Member States with 0.5% as a guideline.
MEPs do insist however, on a more thorough review of the environmental, economic and social impacts of non-land using feedstocks and energy crops by 2020 – with legislative proposals for sustainability criteria to follow if necessary. In addition, biofuels “shall not be made from waste which is subject to re-use and recycling targets”.
Biofuels from algae and “renewable liquid and gaseous fuels of non-biological origin” should count four times, not twice, towards the advanced biofuels target. In addition, MEPs say quadruple counting should apply to “carbon capture and utilisation for transport purposes” and “bacteria”.
The Parliament wants the Commission to consider a Union-level blending mandate for advanced biofuels after 2020.
“Low-ILUC risk” should not be part of the current proposals, MEPs say – opposite to what the Council wants. They suggest instead that the Commission looks into their definition and certification in a first review of the new ILUC rules by the end of 2017. The same review should investigate how effective incentives for advanced biofuels are and competition for biomass with other sectors.
*MEPs propose a 6.5% bioethanol in petrol target for 2020 for each Member State – again, this is not a Council proposal so far.
Finally, the Parliament includes a specific ask on energy efficiency: Member States must increase energy efficiency in the transport sector by at least 12% compared to business-as-usual projections by 2020. MEPs also ask the Commission to recommend additional measures to promote energy efficiency in transport within a year.
“The ILUC debate and following regulatory chaos have poisoned the biofuels industry for more than five years now. Uncertainty needs to end. The package of amendments adopted today is complex and far from perfect, but we welcome the broad consensus in Parliament to establish a mandatory target for advanced biofuels by 2020 and the strong call for longer term support. Likewise, we welcome the re-introduction of a specific provision that guarantees a minimum share of renewable ethanol in petrol within the cap. It is only fair to differentiate those biofuels that are best performing.” – Novozymes (maker of enzymes for bioethanol production)