EU raises emissions allowance cancellation threshold to 700 million

EU countries and the European Parliament have agreed to change the rules of the emissions allowance market: the threshold above which surplus allowances are cancelled will rise from 400 million to 700 million. It is a compromise on a European Commission proposal, which wanted to stop the cancellation mechanism altogether. Czech Prime Minister Andrej Babiš is among those pushing for changes to the allowance system.

What exactly was decided

The Market Stability Reserve helps regulate the number of allowances: when there is a surplus it reduces their supply, and when there is a shortage it releases more to stabilize prices. Since the cancellation mechanism was launched in 2023, more than three billion allowances have been withdrawn from the market and cancelled, according to a statement from EU countries. This restored the balance between supply and demand and eliminated the historical surplus that had built up in the ETS.

The Commission’s proposal was driven by fears of a future shortage of allowances. If every surplus above 400 million kept being cancelled as before, too few might be left later, which would put pressure on prices and on industry’s costs. The European Parliament and the Council of the EU chose to keep protection against the opposite problem, too large a surplus. Allowances will continue to be cancelled, but only when the reserve holds more than 700 million instead of the previous 400 million. The reserve will keep a larger cushion in case allowances run short later.

“This agreement is the first step toward building an ETS for the next decade. It proves that ambitious climate policy and industrial competitiveness can and must go in the same direction,” said Italian MEP Pierfrancesco Maran of the Socialists and Democrats group, the rapporteur on the proposal. According to him, raising the threshold gives the reserve more room and flexibility to intervene.

What comes next for the ETS

Besides the April proposal on the reserve, in July the Commission presented a broader overhaul of the ETS 1 allowance trading system. Among other things, it wants to keep the free allocation of allowances after 2030, but tie it more closely to investment in decarbonization: to keep receiving support, companies will have to submit and carry out emissions reduction plans. Discussion of these proposals in the European Parliament has only just begun.

The ETS is meant to motivate companies to cut emissions: an allowance must be bought for every tonne of CO2, so the more emissions, the higher the costs. ETS 1 is Europe’s main allowance market and covers energy, heavy industry and aviation. ETS 2, which is due to start in 2028 after a one-year delay, will cover road transport and building heating.

According to the agency, the ETS is the EU’s main tool in the fight against climate change, but not the main cause of the current rise in energy prices. The agreed changes respond to demands from a number of governments, including Poland, Italy and Czechia, which want to soften the ETS’s effect on electricity prices. According to EU data, ETS costs make up on average about 11% of the electricity bill in Europe. In Poland it is 24% because of the dominant role of coal plants, and in Czechia and Italy about 20%.

Around Prague, based on reporting by ekolist.cz