EU member states that are phasing out coal should cancel their Emission Trading System (ETS) allowances to protect the bloc's carbon market from a supply-demand imbalance.
That is the latest position of the International Emissions Trading Association (IETA), which yesterday published a paper outlining recommendations to boost resilience in the carbon market.
It warned that a sharp decrease in emissions due to a large-scale shutdown of coal-fired generation would cut demand for European Emission Allowances (EUAs) and result in an oversupply.
The impact can only be mitigated to a certain degree by the Market Stability Reserve (MSR), which aims to absorb the surplus allowances accumulating in the carbon market.
The IETA estimates that the MSR will absorb 24% of the surplus between 2019 and 2023, but that this will decrease to 12% from 2024 onwards.
“Currently the MSR can only partially mitigate the impact of numerous coal phase-outs happening simultaneously,“ IETA EU policy director, Julia Michalak, said.
“We believe that cancellation of allowances by member states is the right solution to ensure the EU's carbon market's resilience to national coal exits.“
The review of the EU's ETS directive for 2021-30 introduced the option for member states to voluntarily cancel emission allowances if there is a closure of electricity generation capacity in their territory.
Further guidance is expected from the European Commission in its review of auctioning regulation, and the IETA urged it to clarify rules for the voluntary cancellation of allowances soon.
However, the IETA said member states should remain committed to ETS allowances as the primary tool for driving emission reductions.
It called for a transparent quantification of gross and net emission reductions triggered by closing down coal-fired power station, both in countries and across the EU, and for the commission to monitor this closely.
“There are still many unanswered questions with regard to the cancellation provision, including the calculation for the number of allowances to be cancelled, advance notification of cancellations, and a template for member states to inform the commission of their intention to cancel EUAs,“ Michalak said.
All these relevant details should be clarified swiftly.“
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