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The reform of the European emissions trading system plays a key role for the successful implementation of the energy transition. Therefore, it is also a major element of the 10-point Energy Agenda published by the Federal Ministry for Economic Affairs and Energy. The reform of the European emissions trading system is to create incentives for investment in low-carbon technologies. Furthermore, the reduction of the number of emission allowances available each year in the context of the emissions trading system helps the EU climate targets to be reached. The emissions trading system covers both industrial and energy-industry production processes.

Reducing surpluses in emissions trading: the market stability reserve

In autumn 2015, the Council and the European Parliament adopted the reform of emissions trading – the introduction of the market stability reserve. As from 2019, 12 percent of the surpluses on the market are to be placed in the market stability reserve up to a threshold of 833 million certificates. Furthermore, the “backloaded” 900 million emission rights and the residual quantities from the free-of-charge allocation up to 2020 are to be transferred to the market stability reserve.

The market stability reserve thus makes a major contribution to the successive reduction of the current surpluses in emissions trading (around 1.8 billion certificates at present). This is to create strong incentives for investment in low-emission technologies, something that is particularly important in the energy sector. The German government actively supported these decisions, even if it would have preferred the market stability reserves to be introduced much earlier, in 2017.

Carbon leakage and protection of industry

Moreover, the October 2014 European Council called for effective protection of the competitiveness of business and industry (carbon leakage rules). The idea is to maintain well-proven existing rules after 2020 and to take both direct costs (purchases of emission allowances) and indirect costs (higher electricity prices) into account. In future, allocations will be better adjusted to changing production levels, and the benchmarks applied will be reviewed based on the advances in technology. Further information (in German) can be found here.

New emissions trading system rules for the next trading period 2021–2030

On 15 July 2015, the European Commission presented its proposal to revise the emissions trading system (ETS) for the period 2021–2030 (4th trading period). It focuses on the following aspects: the implementation of the EU climate target in the emissions trading system (reduction by 43% compared to 2005) by increasing the annual reduction factor to 2.2% for the number of allowances, an auction share of 57%, adoption of carbon leakage rules to protect industry's competitiveness and of special rules on funds and free allocation.

On 15 February and 28 February 2017 respectively, the European Parliament and the Environment Council submitted their positions on the European Commission's legislative proposal. This will be followed by the trilogue consultations between the European Commission, Council and Parliament.

The rules on emissions trading in the next period play a key role for the energy transition as the ETS covers all larger combustion plants, i.e. all larger conventional power plants. Energy companies need to buy allowances for the emissions caused by their energy generation – only part of the certificates in the field of heat generation are allocated free of charge. Furthermore, the ETS is also very important for the national climate targets in the energy sector. Although the EU-wide instrument of emissions trading does not specifically aim to reduce emissions in individual sectors and countries (thus guaranteeing compliance with the national climate objectives), carbon pricing can create incentives for the reduction of emissions and thus help reach the national climate targets.