Market and product

The EU Council, representing the 28 EU member states, on Tuesday gave its final approval on proposed legislation that seeks to overhaul the EU Emissions Trading System for the period 2021-2030.

The Council's formal adoption of the legislation was expected after it agreed an informal deal with the EU Parliament in November.

The legislation includes measures that will take effect in 2019, ahead of a wider overhaul starting 2021.

The legislation includes a range of measures that strengthen the EU ETS including:

- A steeper annual reduction of 2.2% to the cap on CO2 emissions from 2021-2030.

- A strengthening of the Market Stability Reserve such that it removes 24% of the net surplus of carbon allowances each year starting January 2019.

- A new mechanism to limit the validity of allowances held in the MSR in excess of the volume sold at auction the previous year, effective 2023.

The revised EU ETS Directive also includes new measures to protect industry from "carbon leakage" -- the risk of relocating production plants to avoid carbon costs.

Those measures include:

- A continuation of a 57% share of allowances to be auctioned, but with a conditional lowering of this share by 3% if a claw-back of free allowances is triggered, known as the cross-sectoral correction factor.

- Revised free allocation rules to better align allocation with companies' production levels, and updated benchmark values to determine free allocation.

- More targeted rules for free allocation that provide full allocation for the most trade-exposed sectors, with reduced free allocation of 30% for less exposed sectors.

- Member states are allowed to provide compensation for indirect carbon costs in line with state aid rules.

The market overhaul is expected to rebalance supply with demand under the EU ETS after years of oversupply pushed carbon allowances prices as low as Eur2.50/mt in 2013.

Carbon prices have more than doubled since trading at Eur4.40/mt in May 2017, rising to a six-year high of just over Eur10.00/mt this month, gaining support as the proposed market overhaul cleared successive steps in the legislative process.

EU Allowance futures contracts for December 2018 delivery on the ICE Futures Europe exchange in London were quoted at Eur9.76/mt ($12.03/mt) at 1040 GMT Tuesday, up 13 euro cent from Monday's close.

The draft legislation will now need to be translated into the various European languages and will then be published in the Official Journal of the EU, taking effect 20 days later, which is likely to be in April or May.

Tighter supply of allowances is expected to push the carbon price higher over time, improving the relative economics of cleaner electricity generation such as renewables and natural gas-fired plants, and raising costs for emissions-intensive generation such as coal and lignite-fired plants and older, less efficient manufacturing and industrial processes. - Platts -