Yesterday, MEP Ian Duncan released his draft proposal on reform to the Emissions Trading Scheme (ETS), for consideration by the Environment Committee and then the full European Parliament. Sandbag is now analysing the draft proposal in detail and will shortly be releasing a full response.

Phil MacDonald, Analyst at Sandbag, commented:

This is an underwhelming draft, which will leave the Emission Trading Scheme (ETS) ineffective.

The proposal makes weak improvements to carbon leakage provisions, but still risks triggering the Cross Sectoral Correction Factor, taking free allocation from all sectors (although both sectoral growth and benchmarks remain uncertain). To counter this the proposal suggests raiding the auction pot to boost free allocation, further increasing unearned windfall profits to industry, which the October European Council conclusions specifically sought to avoid.

The ETS looks set to become even more complex, and move even further away from driving cost-effective emissions reductions.

It is welcome that the proposal talks of increasing support for Carbon Capture and Storage (CCS), an essential technology for tackling climate change effectively, but funding is reliant on boosting the carbon price. This weak reform seems set to do the opposite.

Fundamentally, Duncan’s draft proposal ignores the enormous surplus of allowances which has long blighted the ETS. Without a plan to tackle this, for instance through cancelling spare allowances in the Market Stability Reserve and raising ambition, the ETS will remain largely irrelevant to the EU’s emission reductions throughtout Phase 4. Worse, a hobbled carbon market will send a message to the world that the EU is not prepared to meet its promises under the Paris Agreement.”

Read more on our tiering proposals to improve free allocation, here.
Read Ian Duncan’s reform proposals, here.