The European emission trading system (EU ETS) has created the world's first major carbon market, with an EU-wide carbon price being a key tool for reducing the EU’s industrial emissions in a cost-effective way. The original policy intention was to create a market-based measure that would stimulate the carbon price and positively influence investment in low-carbon technologies, which in turn would result in emission reductions. Despite a reduction in emissions since the start of the trading system, it currently faces serious challenges.
The economic crisis, combined with an over allocation of credits in the first two rounds of the trading system and a significant influx of external emission reduction credits from the Clean Development Mechanism (CDM), have led to a significant surplus of allowances resulting in a carbon price of around 4 €/tnCO2 (compared to the envisaged 30 €/tnCO2 when the Climate and Energy package was adopted).
In order to address the current imbalances in the EU emission trading system, the Commission’s proposal aims to clarify the legislative provisions on the timing of auctions of allowances, as laid down in Directive 87/2003/EC, in order to adapt the auction timetable..
The proposal is to 'back-load' the system, meaning reducing the number of allowances auctioned over the next couple of years (2013-2015) and increasing the amount later auctioned in phase 3, which ends in 2020. In this way, fewer allowances will be on the market while demand remains very low and more allowances will be offered late in phase 3, when demand should have recovered. 'Back-loading' is not about permanently withholding or 'setting aside' allowances. Any permanent reduction would require a more substantial amendment of the EU ETS Directive to be agreed in a further co-decision procedure.