EN Official Journal of the European Union C 424/46

Opinion of the European Economic and Social Committee on the ‘Proposal for a Decision of the European Parliament and of the Council concerning the establishment and operation of a market stability reserve for the Union greenhouse gas emission trading scheme and amending Directive 2003/87/EC’

COM(2014) 20 final — 2014/0011 (COD)

2014/C 424/07

Rapporteur: Antonello PEZZINI

On 6 and 13 February and on 22 January 2014 the European Parliament, the Council and the European Commission respectively decided to consult the European Economic and Social Committee, under Articles 192 and 304 of the Treaty on the Functioning of the European Union, on the

Proposal for a Decision of the European Parliament and of the Council concerning the establishment and operation of a market stability reserve for the Union greenhouse gas emission trading scheme and amending Directive 2003/87/EC

COM(2014) 20 final.

The Section for Agriculture, Rural Development and the Environment, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 22 May 2014.

At its 499th plenary session, held on 4 and 5 June 2014 (meeting of 4 June), the European Economic and Social Committee adopted the following opinion by 167 votes to 2 with 10 abstentions.

1. Conclusions and recommendations

1.1 The Committee considers the European Union's Emissions Trading System (EU ETS) to be a key instrument in EU climate and energy policy for reducing the EU's industrial emissions, and, therefore, calls for its genuine reform aimed at achieving both the EU's climate objectives for 2020 and 2030 while safeguarding our industrial competitiveness and avoiding investment leakage.

1.2 The EESC supports the proposal to establish a market stability reserve at the beginning of the next ETS trading period in 2021, as a possible measure to deal with post-2020 ETS price volatility.

1.3 The Committee notes that the European Council of 21 March 2014 called in particular for measures to compensate in full for the direct and indirect costs arising from EU climate policies for sectors exposed to global competition, until such time as a comprehensive international climate agreement has established a level global playing field for European industry.

1.4 The EESC calls for: — predefined automatic adjustment mechanisms able to withstand serious shocks with no margin for discretion or interference; — system transparency, predictability and simplicity; — limited transition costs; — predictable investment prospects; — certainty of stable objectives over the long term; — use of the proceeds of auctions to support businesses during the transition towards a low CO2 emission economy and the development and application of clean technologies; — appropriate and innovative support measures for energy-intensive manufacturing sectors; — greater strategic clarity at European and world level.

1.5 In the Committee's view, the emissions allowance trading system overlaps with other European and national policies in the area of environment, climate, energy and industrial development that should be more closely coordinated in order to generate a positive impact: the EESC therefore calls for the revision of the system to be seen in closer association with the other rules affecting greenhouse gas emissions and energy costs for industrial purposes.

1.6 The EESC emphasises that the ETS must be strengthened not only as an instrument to optimise costs and promote energy efficiency in all sectors, but also as a tool for raising awareness among the general public, in order to: — favour low carbon goods and services; — support infrastructure investment; — promote training and capacity-building in sectors that are key to a recovery of the economic value of the European manufacturing sector.

1.7 The Committee points out that industry is constantly engaged in an on-going process of innovation to reduce energy consumption and increase energy efficiency, although it is clear that the distortions of the ETS market, with excessive reductions in the price of carbon, may make it more difficult to boost sustainable scientific and technological innovation.

1.8 The EESC considers that the role of the EU ETS from 2020-2030 should be not only to facilitate an economically viable reduction in carbon for the relevant installations and sectors, by investing in low-carbon technologies, by using renewable energy sources and by acting on energy efficiency, but also to promote access to international offsets. This would serve to limit emissions on the world carbon market, not least in the run-up to the 2015 Global Climate Change Agreement, and in keeping with the sustainable development objectives set out in the Post-2015 Development Agenda concerning integrated approaches for development, equality, human rights and complete environmental sustainability.

1.9 The Committee believes that revision of the ETS from 2021, forming a part of the new 2030 framework for climate and energy should be closely linked to use of the Horizon 2020 programme and coordination of national programmes, in order to speed up a relaunch of sustainable technological innovation. The aim would be to safeguard industrial competitiveness in Europe by promoting new and better industrial locations.

1.10 The EESC is convinced of the need to make the carbon market more stable, flexible and open to all its main global partners, and therefore calls on the Commission, the Parliament and the Council to devise a detailed and coordinated framework for future action, in order to achieve the objective of a competitive and sustainable industrial manufacturing system.

1.11 The EESC emphasises that decarbonisation policies have the capacity to boost employment and have a positive impact in terms of reducing emissions and improving air quality. It also urges that these factors figure prominently in international negotiations.

2. Introduction

2.1 The EU ETS must be an efficient, key instrument for reducing the EU's energy-related emissions. If it is to be cost-effective, it must be market-driven, capable both of stimulating carbon prices and of boosting investment in low-carbon technologies, the development of renewable energies and greater energy efficiency for a competitive manufacturing industry that meets sustainability targets that are shared and adhered to by all the main partners across the globe.

2.2 The ETS currently stipulates that companies required to reduce their emissions are given credits equivalent to the tons of CO2 that they can emit, with the allocation decreasing each year (- 1,74 %). From 2021, this percentage should rise to 2,2 %.

2.3 Since it was set up, the EU ETS has provided an EU-level reference price that every day steers operational and investment strategy decisions on a daily basis with a view to reducing emissions from all sectors of the European economy, which are responsible for approximately half of the EU's greenhouse gas (GHG) emissions.

2.4 However, following the major economic crisis and subsequent slow-down, the system has generated a structural imbalance between supply and demand for ETS allowances, leading to a surplus of some 2 billion allowances. This imbalance seems set to last for more than a decade.

2.5 Market surplus has triggered a meltdown in prices within the EU ETS, dropping from around EUR 30/tonne of CO2 to EUR 13,09/tonne in 2010 and EUR 11,45/tonne in 2011 to reach an average global carbon price in 2012 of around EUR 5,82/tonne.

2.6 Many European countries have seen a range of initiatives, such as the white and green certificates in Italy, which are aimed at reducing carbon emissions by means of savings and efficiency (white certificates) or by replacing hydrocarbons as a primary source of energy with renewables (green certificates) (1).

2.7 Industry is constantly engaged in an on-going process of innovation to reduce energy consumption and increase energy efficiency. It is however clear that with excessive reductions in the price of carbon, strengthening sustainable scientific and technological innovation would become more difficult.

2.8 Under the current rules underpinning the ETS, the supply of emission allowances for auction is set for a considerable number of years, with no adjustments being allowed in response to major changes in demand. This leads to lasting imbalances, with negative repercussions on innovation and investment in new, low-carbon emission technologies.

2.9 In December 2013 the European Parliament and the Council discussed adjustments to be made to the ETS mechanism and decided to allow the Commission — in exceptional circumstances, and so as to ensure the orderly functioning of the market until long-term structural measures are adopted — to postpone, once only, the sale of a maximum of 900 million carbon allowances, setting a new deadline for 2020 instead of the 2014-2016 three-year period.

2.10 In spite of this short-term progress, the EU is still far from resolving the issue of longer-term surpluses.

2.11 According to the Commission, the option of establishing a market stability reserve to begin operating in 2021 — i.e. in phase 4 — would allow the existing rules to be taken on board. This would ensure a more balanced market, with carbon prices more closely steered by medium/long-term emission reductions, and provide stable expectations, encouraging low-carbon investments that would benefit companies that continue to be subject to high energy intensity constraints.

2.12 The reserve should open the way to both tackling the surplus of emission allowances that has built up over recent years and improving the resilience of the system to severe shocks by automatically adjusting the supply of allowances to be auctioned.

2.13 Setting up a reserve of this kind — perhaps better than the back-loading recently agreed with the decision to auction 900 million allowances in 2019-2020 — is supported by a wide range of stakeholders. Under the provisions of the proposed legislation, the reserve would operate entirely according to predefined rules, with no discretion left to the Commission or the Member States with regard to implementation.

3. Summary of the Commission proposals

3.1 The Commission is proposing to establish a market stability reserve at the beginning of the next ETS trading period in 2021. The reserve, together with the recently agreed back-loading of the auction of 900 million allowances to 2019-2020, should open the way to: — tackling the surplus of emission allowances that has built up over recent years; — improving the resilience of the system to severe shocks; — introducing mechanisms to automatically adjust the allowances to be auctioned.

3.2 Under the provisions of the proposed legislation, the predefined automatic adjustment mechanisms would leave no discretion to the Commission or the Member States with regard to implementation.

3.3 The proposal for the ETS from 2021 forms parts of the new 2030 framework for climate and energy proposed by the Commission — on which the EESC is also drawing up an opinion — covering a number of aspects. They include a 40 % reduction in GHG emissions compared to 1990; binding targets at EU level to bring the share of renewable energy up to at least 27 %; more ambitious energy efficiency policies; a new governance method; and a set of new indicators to ensure a competitive and secure energy system.

4. General comments

4.1 The Committee has always ‘supported the move towards more auctioning of allowances. Auctioning is in line with the polluter-pays-principle, avoids windfall profits, gives incentives and generates funds to invest in low carbon installations and products and thus fosters innovation’ (2).

4.2 The EESC considers it crucial to maintain a strong ETS as the keystone of EU climate and energy policy. The system should not operate in such a way as to bring about the decline of the manufacturing sector or investment leakage. This is entirely possible, by reforming the carbon market management system as an effective tool for reducing emissions in industry and other relevant sectors, and by promoting investment in innovative low carbon-emission technologies that are globally competitive.

4.3 The current measures protecting industry under the EU ETS will be largely removed by 2021 and free allocation will be completely abolished in 2027. A new CO2 reduction target in 2030 for EU ETS sectors could entail additional burdens for EU industries.

4.4 Until such time as a comprehensive international climate agreement establishes a level global playing field for industry, the EU ETS should be remodelled in order to fully compensate for the direct and indirect costs of reducing carbon emissions, as a result of EU climate policies, for sectors exposed to global competition. This approach is in line with the conclusions of the European Council of 21 March 2014, which urges the development of measures for the 2020-2030 period to prevent potential carbon leakage, and calls for long-term planning security for industrial investment in order to ensure the competitiveness of Europe's energy-intensive industries.

4.5 In its opinion on the roadmap for moving to a low carbon economy in 2050 (3), the EESC recommended that the Commission bring forward a comprehensive new package of measures to encourage the massive new investment needed to deliver these new targets, which should strengthen the ETS as a cost optimising instrument for guiding investment decisions as well as other measures. These measures should: promote energy efficiency in all sectors; raise the awareness of the general public, citizens and consumers and boost their capacity to use their purchasing power to favour low carbon goods and services, support investment in the infrastructure that will be needed, and promote training and capacity-building in the key sectors.

4.6 The Committee believes that the EU's environmental, climate, energy and industrial development strategies and policies should also be more closely coordinated in order to generate positive synergies. Taking the value of CO2 allowances on the ETS market alone as the ‘carbon price’, ignoring the costs associated with other instruments, such as incentives for renewables or energy efficiency policies, may prove to be simplistic and incomplete, leading to evaluations that are inaccurate overall (4).

4.7 The EESC endorses the conclusions of the Spring 2014 European Council concerning industry's needs in all areas, from energy to competition, trade and training, and in particular supports the principle that industrial competitiveness ‘must be seen in relation to a coherent European climate and energy policy, including through addressing the issue of high energy costs, in particular for energy-intensive industries’.

4.8 The ETS should provide a common legislative framework for the energy sector and high energy-intensive sectors, tackling loss of competitiveness with measures to monitor carbon leakage, and speeding up the implementation of further improvements in non-ETS sectors, which account for more than half of current CO2 emissions in the EU, especially in sectors with real energy efficiency potential such as construction and transport.

4.9 The EESC strongly urges that ETS reform be accompanied by robust measures to stimulate economic recovery through investment in high-potential sectors such as infrastructure, the green economy and in strategic industrial sectors such as research and innovation and, in particular, in the manufacturing sector and small and medium-sized enterprises.

4.10 The EESC is convinced that the ETS could be an effective market instrument for achieving a reduction in greenhouse gas emissions in an economically sustainable manner, in that it is capable of ensuring greater stability. It can do this by curtailing discretionary action and introducing flexibility, in line with predefined rules, based on criteria of transparency, predictability and simplicity, meaning that market operators can build supply adjustment expectations into their behaviour.

4.11 If an ETS is to be effective, it must: — limit transition costs; — offer predictable investment prospects; — provide a certainty of stable objectives over the long term; — use of the proceeds of auctions to support (5) businesses during the transition towards a low CO2 emission economy and the development and application of clean technologies;

4.12 The role of the EU ETS from 2020-2030 should be to facilitate an economically efficient reduction in carbon for the relevant installations and sectors, by investing in low-carbon technologies, by using renewable energy sources and by making robust energy efficiency commitments.

4.13 The market price of ETS allowances must continue as a valid benchmark for investments to reduce emissions.

4.14 The future ETS should retain access to international offsets, as they provide credible means of reducing emissions efficiently by harnessing opportunities to create a global carbon market.

4.15 An improved and extended Clean Development Mechanism (CDM) should be retained, and appropriate levels of support should be given to links between the ETS and the new schemes that are springing up in other parts of the world.

4.16 The EESC considers it essential that the EU make every effort to create a fully-fledged international carbon market, spreading efficient allowance trading mechanisms, open to all major partners, across the world.

4.17 New mechanisms should be developed rapidly and made available for optional use by governments, in line with their national requirements: these mechanisms should be designed so as to avoid, as far as possible, distortion of competition between regions for goods that are traded globally.

4.18 The emissions allowance trading system in fact overlaps with other European and national policies, such as incentives for renewables or energy efficiency, creating market distortions and inefficiency: revision of the system should therefore be seen in closer association with the other rules affecting greenhouse gas emissions and energy costs for industrial purposes.

4.19 Unilateral choices lead to heavier CO2-related costs (primarily energy costs) for companies and can undermine the competitiveness of strategic manufacturing sectors without securing any practical progress from the climate point of view: recent studies have shown (6) that the emissions reductions achieved in the EU are more than cancelled out by the increase in emissions embodied in products imported into the EU.

4.20 In the EESC's view, although it is extremely important to reach a global agreement on climate change in 2015 covering the countries chiefly responsible for emissions, the path of technological innovation should still be pursued by using Horizon 2020 and coordinating national investment programmes, in order to safeguard the competitiveness of manufacturing industry in Europe by promoting new and better industrial locations.

4.20.1 To reach this objective, a detailed and coordinated framework for future action must be devised, aiming at a competitive and sustainable industrial manufacturing system at global level: the EESC therefore calls on the Commission, the Parliament and the Council to prepare such a framework in keeping with the sustainable development objectives of the Millennium Development Goals as set out in the UN's Post-2015 Development Agenda.

4.21 The Committee would again point out that ‘the lesson of the vulnerability of the ETS to global economic forces must be taken into account. It is clear that a globally agreed climate policy (or the failure to achieve one) will determine the future of the ETS and the outcome of the 2015 talks will be crucial and the radical remedial measures which the ETS demands cannot be undertaken without greater global policy clarity’ (7).

4.22 The Committee would stress that the 2030 impact assessment shows that ‘when auction revenues are recycled and if carbon pricing is extended to all sectors, decarbonisation policies can lead to an increase in employment’ (8). Similarly, there are positive effects in terms of reducing emissions and improving air quality, and the EESC therefore calls for these factors to figure prominently in international negotiations.

Brussels, 4 June 2014. The President of the European Economic and Social Committee Henri MALOSSE

(1) In compliance with the provisions of Directive 2006/32/EC which requires all the Member States to draw up national energy efficiency action plans, with the aim of reducing consumption and boosting renewable energy sources.

(2) OJ C 27, 3. 2. 2009, p. 66.

(3) OJ C 376, 22.12.2011, p. 110.

(4) OJ C 226, 16.7.2014, p. 1.

(5) See ‘Comparative study of different measures funded through the use of economic environmental instruments’ (EESC 2012).

(6) Glen P. Peters, Jan C. Minx, Christopher L. Weber and Ottmar Edenhofer (2010), Growth in emission transfers via international trade from 1990 to 2008, (PNAS); A. Brinkley, S. Less, Carbon Omissions, Policy Exchange, research note (2010).

(7) OJ C 341, 21.11.2013, p. 82.

(8) See SWD(2014) 18 final. Executive summary of the impact assessment, 22.1.2014.