IETA welcomes the European Commission’s Winter Package as a further step toward harmonising the bloc’s climate and energy strategy.
The Winter Package includes legislative proposals to implement the remaining building blocks of the EU’s 2030 Climate and Energy Framework; in particular, it includes a proposed Renewable Energy Directive and Energy Efficiency Directive.
While we are pleased that the Commission has introduced these proposals to update existing regulations for the next decade, we believe great attention should be paid to ensuring that the new proposals work well in coordination with each other and with the EU ETS.
Policy overlap should be avoided as a matter of principle. Overlapping policies inhibit the market effectiveness of the EU ETS which is, as the Commission has emphasised, the central pillar of the bloc’s strategy to reduce GHG emissions cost-effectively.
Several studies estimated that emissions trading has the lowest cost per tonne of CO2 abated compared to other types of regulation. As such, it should be the preferred option to decarbonise the economy in the most cost-effective way. The ETS avoids the unnecessary economic burden to society associated with other types of regulation.
Moreover, an analysis carried out by IETA last year showed that the combined impact of the Energy Efficiency Directive and Renewable Energy Directive would lead to an additional reduction in demand for ETS allowances of more than 700 million tonnes of CO2 by 2020.
Without additional measures to ensure this reduced demand is reflected in the EU ETS cap, this would have a significant impact on the supply and demand of allowances and on the carbon price.
IETA would therefore welcome clear and transparent estimates of delivery of emission reductions and their timing through these non-market regulations, as well as the CO2 abatement costs associated with these measures, as a way to inform the policy making discussion.
If despite these considerations, there is evidence that some elements of the Winter Package would cause a material impact on the ETS, then an ex-ante discussion is required to assess whether the baseline of the ETS should be adjusted going forward.
The ongoing revision of the EU ETS for Phase 4 is a good opportunity to ensure that the functioning of the carbon market will not be affected by the impact of other policies.
As outlined in our position paper, IETA recommends that the ETS Directive itself spell out the process by which such assessments and reviews will take place to address transparently the question of policy interaction.
In summary, to ensure the market is equipped to take on the challenge of functioning for its fourth and longest Phase, IETA encourages greater policy coordination and harmonisation amongst the various energy and climate policies before 2020.