Changes from report parliamentary committee draft to plenary report

Background:

The proposal is a response to an initiative of 19 Member States from 1 July 2025. In their “Joint non-paper by Austria, Belgium, Bulgaria, Croatia, Czechia, Estonia, France, Germany, Greece, Italy, Latvia, Lithuania, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain on ETS2 price uncertainties and possible improvements”, these Member States expressed their concerns about significant uncertainties regarding future price levels and volatility of the ETS2. The three main concerns included the uncertainty around the initial price level in 2027, the risk of price volatility due to the sharp threshold in the design of the Market Stability Reserve, and the insufficiency of the safeguards against possible high price levels as these could result in substantial negative social impacts.

To alleviate the concerns around price uncertainty and social impacts and to strengthen the public acceptance of the system, the 19 Member States proposed the consideration of the following measures: to publish regularly information to better inform price forecasts for ETS2; to launch early auctions to reduce price uncertainty; to smoothen the MSR trigger mechanism to limit volatility, as in ETS1, and increase the released MSR volumes in tight market conditions; to extend the MSR lifetime beyond 2031; and to reinforce the price control mechanism.

The current Commission proposal smoothens the trigger mechanism to limit volatility, it extends the lifetime of the MSR beyond 2031 and reinforces the price control mechanism with 20 million additional allowances in the case of a release. The Commission assures the additional release will occur twice within 12 months if the condition in Article 30h(2) of Directive 2003/87/EC is met again after six months in a statement included in the explanatory memorandum accompanying the legislative proposal.

Expectations of ETS2 allowance prices vary across different studies conducted. Studies taking into account an adjustment to the MSR for ETS2 also show a range. While analysis by Veyt expects a price of slightly above €60/tCO2e by 2030, BloomberNEF suggests the average price of the allowances under ETS2 after the proposed changes would reach an average price of €78/tCO2e in this decade with the price potentially surpassing €100 at the end of the decade. In addition to that, the consensus is that households will be affected asymmetrically with low income households being affected the most while the impact is also different across the EU with highest increases of heating costs in Eastern and Southern member states.

Position of the rapporteur:

The rapporteur considers the changes made to the MSR by this proposal to be steps in the right direction. However, the price control mechanism would still benefit from a sooner beginning of the intervention when the condition in Article 30h(2) of Directive 2003/87/EC is met in order to start mitigating the surpassing of the price level sooner. That is why the rapporteur proposes to shorten the period within which the distribution of the allowances from the reserve has to start in order to strengthen the reactivity of the price control mechanism from two months to 30 days.

Adjustments of the MSR should not be the main solution to ensure price stability and limit social impacts of the ETS2. Key to the orderly implementation of the system is the deployment of complementary decarbonisation measures in Member States which are essential for the reduction of fossil fuels consumption. The price elasticity of households is generally lower than that of companies which makes timely support towards energy efficiency, renewable sources of energy for heating and decarbonisation of transport essential. Decarbonisation policies are currently the most effective tool for ensuring the adequacy of the development in the prices of traded allowances and, consequently, the prices of commodities affected by them.

The statement of the European Commission that it considers that, if the condition in Article 30h(2) of Directive 2003/87/EC is met again after six months, paragraph 6 of Article 30h should be disapplied in accordance with the procedure set out in paragraph 7, is an important part of the proposed strengthening of the excessive price control mechanism. As such, it is appropriate to make reference to it in a recital of the legislative act itself.

The rapporteur also considers that the changes made by this proposal might not be sufficient to mitigate the potential of excessively negative impact of the ETS2 on most vulnerable households. It would be appropriate for the Commission to conduct an impact assessment of the system after the MSR is revised with this Decision to assess the adequacy of the social and environmental impacts of the system.

Reflecting the concerns of numerous colleagues, the rapporteur has included a non-exhaustive list of options in the recital for mitigating the potential social impacts of the ETS2, and thereby supporting its public acceptance of the system across the EU, which the Commission should take into consideration in the context of the revision of the ETS Directive. These options are:

- allowing Member States to temporarily not apply the system to residential buildings by way of derogation, provided the Member States have in place other measures to achieve the effort sharing targets;

- strengthening and prolonging the EUR 45 price cap set in 2026 prices, and adapting the market stability reserve accordingly, including the frequency and volume of releases of allowances and the volume in the reserve if necessary;

- ensuring the possibility for full compensation of the costs passed through to vulnerable households.

Such measures may be useful to ensure the smooth and orderly functioning of the emissions trading system, including in situations where temporary imbalances between allowance supply and demand could give rise to excessive price volatility. All of these should be assessed on the basis of their social and environmental impact.

Even after the proposed MSR revision, the ETS2 would currently not contain sufficient safeguards for exceptional emergency situations. Current mechanisms in the ETS2, referred to in Article 30h (1) and (3) of Directive 2003/87/EC, which address price spikes, would in the current form allow for sustained and relatively sharp price increases without releasing allowances. That is why the rapporteur also suggests the Commission to assess the possibility for a stronger emergency mechanism, namely a stronger additional price ceiling imposed in exceptional circumstances.

The early auctioning period should be used by the Commission to carefully analyse the development of the price of the allowance. It should then present a report to the European Parliament which would inform about the adequacy of the price control mechanism in light of the information on the dynamics of the market in the early allowances.