Insights and Commentaries
Proposed Market Stability Reserve to stabilise European carbon trading
15th June 2015
Topic(s): Carbon capture, law and regulation, Policy, use and storage (CCUS)
A new Market Stability Reserve (MSR) has been proposed to stabilise the carbon price under the European Union Emissions Trading Scheme (EU-ETS). The Global CCS Institute's Francesco Corona, Communications Adviser for Europe, Middle East and Africa reports here on the proposal and what it might mean for carbon capture and storage (CCS).
In May, the European Parliament and the European Council (EC) reached an informal agreement on the establishment and operation of a Market Stability Reserve (MSR) for the EU-ETS. The legislative proposal to establish an MSR seeks to address the problem of an oversupply of allowances which has led to a low carbon price. The reserve is proposed to prevent extreme fluctuation of the carbon price by reducing or increasing the supply of allowances.
In the compromise package agreed by the two Institutions, the MSR will be established in 2018 and will become fully operational from 1 January 2019. The auction of 900 million allowances was postponed to 2019-2020 from the originally proposed 2014-2016, and these "backloaded" allowances will be placed in the market reserve. Unallocated allowances will be directly included in the MSR in 2020, while their future usage will be decided in the upcoming EU-ETS review.
The MSR will have a strong impact on low carbon technologies which rely heavily on carbon price in the EU ETS, including carbon capture and storage (CCS). While the market reserve will certainly have a direct impact on availability of funds, the question of when the allowances are to be monetised will determine whether and when CCS technology will benefit from the fund. The carbon price plummeted in 2009 and significantly reduced the size of NER 300, the fund designated to support CCS and renewable energy technologies. Of 14 projects that applied to NER 300 in the first and second calls only one CCS demonstration project was successful. As NER400 is not likely to be monetised before 2021, it would result in a gap of at least seven years between schemes able to deliver CCS funding.
Ms Jelena Simjanovic, EU CCS Network Project Manager, presented on this topic at the Carbon EXPO held in Barcelona at the end of May, 2015. In order to contribute to the CO2 emissions reductions agreed by the EC, CCS technology needs farmore support, on the financial as much as on the regulatory level. Ms Simjanovic emphasised the need for establishing a bridge fund between NER400 and its predecessor because long-term policy and coordinated financing mechanisms are the key for long-lasting support of technology development, investor confidence and market certainty.
The new European Commission, new Parliament and the European Council have spoken positively about the importance of CCS, so there is ground for optimism that lessons have been learned and that EU policy will continue to evolve in a positive direction for CCS and other low carbon technologies. Following the European Parliament vote on the MSR proposal at its plenary session in July, a broader review of the EU-ETS will begin its legislative process. This will provide EU Institutions with the opportunity to take the lead on driving investment in low carbon technologies.