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The European Parliament has voted through proposed temporary reforms to the EU's emissions trading system (EU ETS), after the Parliament's Environment Committee set stricter conditions for the proposed "backloading" of allowances.

The latest proposed reforms will prevent the European Commission from backloading more than the 900 million allowances and from carrying out the backloading exercise more than once. The backloading will also be subject to an impact assessment showing that there is no "significant risk" of businesses relocating outside the EU if the change goes ahead.

"We now have a mandate, as Parliament has endorsed our proposals," said German MEP Matthias Groote, who is leading on the promotion of legislation at the European Parliament. "We will start negotiations with EU ministers as soon as possible and seek a common solution that will allow the ETS to fulfil its purpose."

Carbon price still 'incredibly low'

Environment expert Fiona Ross of Pinsent Masons, the law firm behind Out-Law.com, welcomed the amended proposals, which must now be approved by EU member states. However, she added that the EU carbon market would need more than "one-off measures" to address an "incredibly low carbon price, which currently sits at a level around 70 per cent lower than it was three years ago".

"Many have suggested that what is needed is proper structural change and in particular the removal of a volume of European Union Allowances permanently from the market in light of what is understood to be a significant surplus in allowances," she said.

"The EU ETS has charted a rocky road since its inception, and has not managed to consistently and without intervention support a carbon price sufficient to drive low carbon investment. Its critics, which include some former supporters, say the time for 'tinkering' is now over, and that a proper review of the structural issues plaguing the mechanism is overdue," she said.

The Commission has proposed transferring some 900 million allowances that would otherwise have been made available for auction between 2013 and 2015 under the third phase of the EU ETS to later in the same period.

By doing so, it hopes to address the build-up in allowances caused by reduced industrial activity during the economic downturn. The European Parliament narrowly voted to reject the proposal in April, citing concerns that it would undermine the competitiveness of European industry.

In its first report on the carbon market (12-page / 225KB PDF), published at the end of last year, the European Commission proposed six longer-term structural changes to the EU ETS, including an increase in the EU's carbon reduction target from the current 20 per cent to 30 per cent by 2020, the permanent cancellation of a number of allowances or an extension to the scheme to cover additional sectors.

The UK government, along with climate change ministers from another 11 EU member states, have pressed for an announcement on longer-term structural reform before the end of the year.

"There is an urgent need for the carbon price to be stabilised across the EU to provide certainty for investors," said Eluned Watson, environment and energy law expert with Pinsent Masons. "The positive vote by the European Parliament shows that there is the political will and support to take action to strengthen the EU ETS and the price of EUAs during the early years of Phase 3 and comes despite intense and protracted lobbying by some of Europe's energy intensive industries, many of which still hold concerns that interfering with the carbon market will lead to unintended consequences."

"Despite such concerns, the vote does pave the way for the deeper structural reform of the EU ETS that is required to restore the credibility and effectiveness of the EU ETS in the long term. The need now is to focus on negotiations with the European Council as soon as possible in order to reach a first reading agreement. The adoption of the proposals may not be until mid-2014 at the earliest," she said.

The EU ETS was established in 2005 and was the first major emissions trading scheme in the world. Phase 3 began on 1 January 2013 and runs until 2020. Under the scheme there is a cap on greenhouse gas (GHG) emissions from prescribed energy intensive installations.

Installations must purchase GHG emissions allowances, called European Union Allowances (EUAs), which represent the right to emit or discharge a specific volume of emissions in line with national allocation plans. Operators of installations must hold EUAs equal to, or more than, total emissions at the end of the EU ETS year and those with excess allowances can 'bank' them or trade with those who need to buy more allowances to comply with emissions limits.

Copyright © 2013, Out-Law.com

Out-Law.com is part of international law firm Pinsent Masons.

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