BRUSSELS, 6 June - Introduction of carbon floor prices by European countries would add unnecessary overlaps with new reforms to the bloc’s carbon market, creating risks of market distortions with no environmental benefits.
Some EU countries are considering proposals that would “fragment the EU’s carbon market, reducing its efficiency and lead to competitive distortions,” according to a new position paper published today by the International Emissions Trading Association (IETA).
The association is calling on EU member states to refrain from introducing national carbon floor prices and to focus instead on supporting the EU Emissions Trading System’s role as the primary tool for emissions reductions.
“The major reforms adopted last year are still in the process of implementation,” says Dirk Forrister, IETA’s CEO. “It’s important that those decisions be allowed to work before adding more layers of policy. Floor prices aren’t needed when you have an operational market stability reserve (MSR) that automatically adjusts supply.”
The MSR, which will begin to operate in January, will withhold from the market 24% of the calculated oversupply each year from 2019-2023, and 12% of the surplus each year thereafter. The European Commission estimates that the reserve will remove around 397 million EUAs from circulation in 2019.
Under a national floor pricing mechanism, a country might set a minimum price for emissions that may or may not be higher than the EU ETS market price. During the four-year legislative process that produced the ETS reform package, EU leaders considered and rejected an EU-wide floor pricing option, instead selecting the MSR as a preferable policy.
IETA contends that adding this extra mechanism now would act as a tax and not as a dynamic incentive to find lowest-cost emission reductions. It would simply shift emissions from countries with high price floors to others with no floors, offering no real environmental gain.
“A cap-and-trade system guarantees the delivery of the environmental target set by the cap and establishes a price that reflects the marginal cost of abatement,” says Simon Henry, IETA’s director of EU policy. “We call on Member States to maintain commitment to the EU ETS as the primary tool for European emission reductions and not introduce additional carbon pricing measures on industry.”
IETA’s position paper can be found here.