The amendments submitted by ENVI MEPs for the Market Stability Reserve (MSR) reached Sandbag on Friday last week. Relative to the ITRE amendmentsthat came out three week ago many of the ENVI amendments represent a welcome step up in terms of environmental ambition. However, Group and geographic cleavages persist, and an MSR able to tackle the vast surplus on the Emissions Trading Scheme is not yet certain. The ENVI Committee will vote on these amendments on the 24th February 2015.

Positive political developments

The most positive news is that the S&D, which had tabled a great variety of amendments in the ITRE committee, has come a long way in consolidating its position. Their shadow rapporteur, Matthias Groote (Germany) has been busy constructing valuable bridges bringing Southern and Eastern European MEPs (Miriam Dalli from Malta, Giorgos Grammatikakis from Greece, Pavel Poc from the Czech Republic, Claudiu Ciprian Tănăsescu from Romania), bringing them into the fold of a welcome progressive position. Members of the British S&D (Seb Dance, Paul Brannen) neatly dovetail with their continental counterparts. It now looks likely that the bulk of the S&D could support an early-start and dealing with the backload and unused allowances, whether by cancellation or transfer into the Reserve.

The Greens form a natural vanguard, with the closeness to their position of the Italian Five Star Movement and some of the GUE and ALDE Members, already revealed in ITRE, persisting in ENVI. Together, these MEP clusters draw the discussion into a more ambitious direction beyond the original Commission proposal, including a higher annual percentage adjustment, and a cap on the size of the Reserve, cancelling allowances if it becomes too bloated.

Peak District at Christmas

Political challenges to be overcome

Unfortunately, the slower progress in the Council has a strong influence on MEP positions. Thus, despite a lack of signs that any other Member State would endorse the thresholds and adjustments proposed by Paris, French EPP preferred to table their government’s proposals rather than coordinating with other Group Members. Madrid’s silence on both the matter of the MSR’s start and the treatment of the backload may also be linked to the worrying silence of most Spanish MEPs, making it difficult to evaluate what position they might vote for. Further, perhaps reflecting the positive decision of Rome to support an early start but its current indecision on how to treat the backload, Italian MEPs are split along Group lines on a number of issues: The Italian EPP have co-signed a number of crucial amendments with their French colleagues instead of being drawn into the large cluster of EPP MEPs rallying around Mr Peter Liese (Germany), the Five Star Movement lends its support to the Greens, and the Italian S&D, although adopting the progressive position of Mr Groote’s broad church on the matter of the early start, display markedly more conservative concerns on most other aspect of the debate. Finally, as will be shown in greater detail below, the Poles, behind whom doubtlessly many other Eastern European states quietly rally, persist in their desire to extract concessions before agreeing to an MSR.

When it comes to Groups, the more conservative tone adopted by Jan Huitema (ALDE, Netherlands) relative to his shadow rapporteur and countryman, Gerben-Jan Gerbrandy shows that some concerns about the impact of the MSR reform on industry remain to be ironed out within their Group. Furthermore, the mildly Eurosceptic ECR Group is split into diametrically opposing camps between its British Members, who favour an early start and placing the backload into the MSR, and its Polish Members, who seek to weaken and delay the MSR as much as possible (but still appear to support the MSR in principle).

This position taken on by the Poles takes on troublesome dimensions in the EPP. There Mr Liese’s efforts are opposed by a thoroughly coordinated cluster of Polish MEPs, who have secured cosigning by ITRE Member Jerzy Buzek, ex-Prime Minister of Poland and ex-President of the EP. These Polish EPP Members’ have tabled amendments to make the launch of the MSR conditional on inscribing the concessions that Eastern Member States had gained in the October Council into the ETS Directive, and attempts to insulate the groups of allowances that these States have been promised from the yearly adjustments the MSR would make. The Polish EPP expressly precludes policy details that have entered the mainstream, while putting forward a number of unusual proposals to hobble the MSR.

The devilish details

The Commission proposed to launch the Reserve in 2021, withholding a volume equal to 12% of the market surplus from auctions if the surplus were larger than 833 Mt and releasing 100 Mt from the MSR if the surplus dipped below 400 Mt – based on market data from two years prior. Indirectly acknowledging that the release through auctions of the 900 Mt of backloaded allowances in 2019 and 2020 and a comparable volume of unallocated free allowances in 2020 would disrupt the carbon price in those years, the proposal also included a smoothening mechanism transferring two thirds of these EUAs to 2021 and 2022.

Mr Ivo Belet’s November amendments accept by and large the Commission parameters, but they withhold the backload from the market in 2019 and 2020, and place it into the MSR in 2021. Additionally, Mr Belet proposes a 1-year response time for the MSR, a technological innovation fund financed by allowances placed in the MSR, and the promise of a review of the ETS Directive to take place after the MSR package is concluded, through which the most efficient installations would not incur carbon costs, and free allocation would become more responsive to production changes.

Many of the rapporteur’s proposals, such as placing the backload into the MSR and the 1-year lag, have become part of the ENVI mainstream, with the battle lines being drawn around the question of how much more, or less, sturdy the MSR reform ought to be. For instance on the matter of an earlier start, beyond a smattering of mostly Iberian GUE members objecting to the ETS overall, the only MEPs opposing the emerging consensus that the MSR should start in 2017 are Polish MEPs from EPP and ECR – neither of which offer any justification for their later proposed dates. Amendments tabled by Polish MEPs similarly lie on the least ambitious end of the spectrum in the case of both thresholds and adjustment percentages, in stark contrast to other MEP clusters’ positions. Thus, on thresholds Mr Liese’s EPP, the S&D, Ms Kyllönen’s GUE, and Mr Huitema flock more or less to the Commission values, while the Greens, the Five Star Movement, Mr Gerbrandy’s ALDE MEPs and Sirpa Pietikäinen (EPP, Finland) push ambition by proposing tightened ranges – with the situation repeating itself in the case of the adjustment percentages. Mr Groote’s S&D and his British colleagues, the Greens, and some of ALDE and of GUE support cancelling the backload and of the allowances unallocated by the end of the phase. ENVI Chair La Via (EPP, Italy) came out in support of cancellation of half the backload, but was not joined by any other EPP Members – in fact, the Polish EPP expressly requesting that the backload be released into the market.

A final area of tension is the matter of how to deal with concerns by industry, i.e. how to protect against carbon leakage, how to compensate for indirect costs and whether the free allocation regime should be updated to better reflect changes in production – and, crucially, whether these three matters are even germane under the MSR file. Pointing out that the MSR only affects volumes of auctionable allowances and that carbon leakage protections have been granted up to 2019, Mr Groote’s S&D, Mr Gerbrandy’s ALDE and the Greens and the Five Star Movement do not touch upon this issue area in the MSR package, whereas everybody else, including the Poles, seems to be keen to propose amendments that would bind the Commission to propose measures to deal with them immediately after the MSR package has been agreed upon.

ERKI EP Colour

Ideas outside the mainstream

One novel idea grown out of the frustration with the poor incentives granted by the ETS to eliminate highly carbon-polluting coal from electricity generation is to be found in the separate proposals of Bas Eickhout (Greens, Netherlands), members of the British S&D, and Sirpa Pietikäinen (EPP, Finland)to introduce an Emissions Performance Standard. Sandbag strongly welcomes this proposal as an indication about the direction that European climate policy should develop into, whether or not negotiations produce a fully-functioning MSR.

A further idea, tabled by French and Italian EPP Members, is to earmark auction revenues as the basis for the creation of a harmonized EU-wide system for compensating companies for indirect costs stemming from electricity. This is cautiously echoed by Italian S&D Members, who also call for such a harmonized system – although they keep silent about how it should be financed. Although this issue is not directly tied to the MSR, the presence of these amendments suggests the need for further dialogue within the EPP and S&D Groups.

In strong contrast to Mr Eickhout’s and Ms Pietikäinen’s proposal is the Polish EPP’s amendments to create a carbon price ceiling at EUR 20 beyond which the MSR would stop removing allowances from auction, regardless of the supply-demand imbalances on the carbon market. Alongside their explicit ask to make the review of the MSR focus only on economic issues and energy prices, this betrays a complete disregard to the fact that climate change is a continuously aggravating problem in large part driven by energy prices that do not appropriately factor in the negative externalities of the use of fossil fuels. It bears pointing out that this EUR 20 cap by-the-back-door on the carbon price may obviate the need for carbon leakage protections for industry if, as Mr Groote’s S&D suggests, the protections would have to reflect the carbon price at the time of their introduction.

Working towards a deal

The strong unity between the Greens, the Five Star Movement, and progressive Members of GUE and ALDE is a welcome call towards a more progressive direction than the Commission’s proposal. However, beside very welcome overtures made by Mr Groote’s S&D to the East and South, the centre requires further shoring up. This is especially so as the EPP is split between the Franco-Italians, Mr Liese’s allies, and the Polish MEPs and whoever may be silently rallying behind them. More effort also needs to go into achieving further geographical balance. This is true in equal measure for Eastern Europe, whose MEPs are likely to be silently hiding behind the Polish EPP and ECR position, and the Iberian Peninsula, whose two countries need to develop positions that go beyond the unconstructive input of some MEPs on the fringes of GUE. The ENVI amendments suggest that there is agreement that some sort of MSR be indeed introduced, but intense negotiations will be necessary over the next two months to ensure that ENVI push the envelope as far as possible to ensure an effective Plenary outcome.

Amendments Table ENVI

More information:

Photo of the European Parliament, Brussels, by erki. Used under a Creative Commons licence.