ETS reform agreement catches its architect by surprise

On Tuesday evening (28 February), the European Council agreed its position on the Emissions Trading Scheme (ETS). MEP Ian Duncan admits he didn’t really see it coming.

Ian Duncan is an MEP with the European Conservatives and Reformists (ECR) and represents the Scottish Conservative Party at a domestic level. He is the European Parliament’s rapporteur on ETS reform.

Just that morning I had declared to the Argus Emissions conference in Prague that Council agreement was unlikely before summer at the earliest. By the time I disembarked from my flight, twitter was ablaze with the news that Council had done a deal. Hereafter I will retire my crystal ball.

At first glance, the substance of the Council position is as surprising as its arrival was epiphanic. Member states have agreed to mop up the glut of allowances that have been swashing around the market since 2008.

Somewhat unexpectedly, many of their proposals mirror the elements of the agreement that emerged from the parliamentary bunfight: cancellation of a significant number of allowances and increasing the withdrawal rate of the Market Stability Reserve (MSR) being the two main elements.

The Council has even embraced the ‘Duncan’ mechanism (am I the only person to call it that?), whereby a certain number of allowances originally earmarked for auction by member states are allocated free of charge to industry should the so called Cross Sectoral Correction Factor (CSCF) rear its ugly head.

The Council has moved quite some way from its position of only a few months ago. When the Commission sought to establish a Market Stability Reserve (MSR) back in 2015 the final withdrawal rate was agreed at 12%, and that was a tough fight.

Now a consensus is emerging for a doubling of the rate. (Worth remembering that the MSR doesn’t even come into being until 2019; we are literally reforming before commencing).

So will the trialogues be a love-in? A quick round of back slapping before raising a celebratory tumbler in the nearest hostelry?

No, although the Parliament has dragged the Council toward its home ground, there remain a number of issues both teasing and tricky.

The Council would like to cancel allowances only after 2024. The Parliament wants cancellation up front.  Parliament wants a steeper reduction in the rate of emissions – the so called Linear Reduction Factor – from 2024 onwards. Member states are content with the less ambitious Commission position.

There are some major diversions in position too – Parliament wants to see the maritime sector under the wing of the ETS whereas the Council are content to keep shipping adrift.

The structure and sourcing of the funds will be difficult to agree, too with the Council less keen than Parliament to raid treasury coffers to assist industrial innovation or compensate for indirect costs.

But it is clear that the Paris Agreement has changed the world, and is slowly changing the Council. The Council position demonstrates that member states recognise the scale of reform needed to get the ETS working and bring it into alignment with Paris.

There is still much work to do, but we are far ahead of where I thought we were going to be and our positions are far closer together. Not a bad start for the trialogues.