The EU Parliament on Wednesday voted on its position on proposed reforms to the EU Emissions Trading System after 2020, putting in place a key step in the EU's co-legislative process in overhauling the bloc's carbon market.
The parliament backed key elements of the proposed changes to the EU's flagship emissions reduction system, which seek to rebalance the market by tightening supply over time, while protecting industry from international competition.
The measures backed by the parliament include a doubling of the intake rate for the Market Stability Reserve for the first four years of its operation, which will withhold surplus carbon allowances starting in 2019.
The parliament's vote, subject to EU Council approval, means the MSR will withdraw 24% of the surplus each year for four years instead of the European Commission's originally proposed 12% rate.
The parliament also backed the European Commission's proposal for the annual CO2 cap under the EU ETS to fall by 2.2% a year over 2021-30, and rejected a proposal to increase this rate to 2.4%.
However, the parliament rejected a proposed import inclusion mechanism whereby a carbon tax would have been levied on imports of certain materials at EU borders.
The parliament's vote is a major part of the legislative process, and the proposals will now require the support of a majority of EU member states in the EU Council to pass into law.
The parliament's vote will form the basis of negotiations on proposed EU ETS reforms with EU member states in the EU Council.
Approval of the measures by the EU Council would be expected tighten the rules on the EU ETS, bringing in a more rapid removal of surplus allowances from the system which could raise the cost of emitting CO2 for Europe's power plants, airlines and operators of refineries, metals and chemical manufacturing plants, among others.
The legislative efforts to reform Europe's carbon market center on two broad goals: to strengthen the EU ETS to ensure adequate environmental ambition and to deliver meaningful price signals, and to ensure that industries exposed to international competition are adequately protected, through measures including free allocation of CO2 allowances.
The voting results on Wednesday were broadly in line with market expectations.
EU Allowance futures contracts for delivery in December 2017 on the ICE Futures Europe exchange rose as high as Eur5.26/mt during the voting process but fell back to Eur5.10/mt by 1220 GMT Wednesday, down 3 euro cent from Tuesday's close. - Platts