The Government is backing stronger reforms to make the EU Emissions Trading System work more efficiently and stimulate investment in low-carbon technologies, it has been announced today.

The Government is backing stronger reforms to make the EU Emissions Trading System work more efficiently and stimulate investment in low-carbon technologies, it has been announced today.

The UK believes a Market Stability Reserve will help Europe meet its greenhouse gas emission reduction obligations more cost effectively through the EU ETS.

Energy and Climate Change Secretary, Edward Davey said:

“A strong EU ETS can be a symbol to the rest of the world – but that is not what we have now.

“Europe has the opportunity to show the world how we can cut emissions while creating investment, jobs and growth – but only if we reform the system, and reform it fast. Otherwise we’re facing increasing costs for businesses, uncertainty for investment and ultimately higher costs for consumers, which isn’t acceptable.”

An insufficiently ambitious cap, combined with the economic recession and other factors, has resulted in a surplus in the EU ETS of around 2 billion allowances, undermining the functioning of the market. The result is that the system is not sending the right signals to low carbon investors, increasing the overall costs of meeting our future carbon reduction obligations.

The MSR will address this issue by creating an allowance reserve that will increase or reduce the supply of allowances in the system in response to levels of demand, allowing the market to operate effectively as external circumstances change. This would offer a long term solution to the surplus beyond ‘backloading’, under which allowances are being removed but are due to return from 2019.

However, along with Germany and others, the Government believes that the Commission’s MSR proposals need to be strengthened to adequately correct the problem of oversupply and protect against future imbalances.

The UK is therefore calling for:

• the MSR to be brought forward to 2017 to reform the ETS as soon as possible so that it helps drive the low carbon investment we need;
• backloaded allowances to be kept out of the market, either through cancelling them or placing them directly into the reserve; and
• improvements so that allowances do not return prematurely, to ensure business can access allowances should significant shortages emerge in the future.