The EU will cancel a billion pollution permits under a package of carbon market reforms agreed by EU lawmakers on Thursday.
The industry-friendly European People’s Party Group reached a compromise with advocates for more ambitious climate policy in left-wing, green and liberal blocs.
The environmental committee also recommended shrinking the cap on greenhouse gas emissions for the bloc’s heavy industry faster next decade – although that could be overturned by member states.
Haege Fjellheim, analyst at Thompson Reuters Point Carbon, said the package “sends a bullish signal” on carbon prices compared to previous versions.
That might take a while to kick in, though. Carbon prices got a temporary boost on news of political agreement Wednesday before falling back below €5 a tonne, reported newswire Carbon Pulse (£).
“They [lawmakers] are trying to tighten the market, but it remains to be seen whether the market will be impressed by this,” said Fjellheim. “It is still very oversupplied.”
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Green groups would like to see the reforms go further to cut a surplus of allowances and give a stronger incentive for low carbon investment.
“They are making some changes for the better, but they don’t go by any means far enough,” said Anja Kollmuss, climate policy coordinator at Climate Action Network.
An excess of permits is set to grow to 4.5bn by 2020, she said.
The big emitters that take part in the market were divided. Power companies supported tightening the supply of permits, recognising that this will boost the value of nuclear, gas and renewable energy assets.
Heavy industries like steel and cement see fewer opportunities in a high carbon price world, warning that investment and jobs will flow overseas if EU regulations get too stringent.
That is a narrative NGOs have tried to dispel, arguing that these sectors are profiting from free allowances and evidence of so-called “carbon leakage” is weak. But it has proved persuasive with many MEPs.
Agnes Brandt, analyst at Carbon Market Watch, said the reforms moved in the right direction: “The cement sector has been free riding on the EU ETS for too long, with European citizens and low-carbon frontrunners footing the bill. With this vote we have a positive signal from lawmakers that EU’s carbon market is finally moving away from subsidising Europe’s largest polluters.”
A central pillar of EU climate policy, the emissions trading system has inspired similar efforts in other jurisdictions. Notably, China is set to bring in a nationwide scheme next year.
This article was updated on Thursday morning to reflect the decisions taken