The International Emissions Trading Association (IETA) has called for a reform of the EU Emissions Trading Scheme (ETS) to change the cap trajectory as well as to review the cap setting process.

In a press release, the organisation confirmed its support for the EU ETS but said that fragmented EU and national policies are undermining its price signal. Moreover, according to IETA: “The current extraordinary economic situation is amplifying this effect. This has led to the false impression of many stakeholders that the EU ETS is failing.” Currently, Phase III of the EU ETS (2013-2020) will be oversupplied by 500m-1.4bn allowances. The accumulating surplus undermines the confidence of market participants in the system.

To rebuild confidence in the scheme, IETA proposes a system reform which would see a change in cap trajectory to align mid-way climate targets with 2050 objectives as well as ensuring the intended relationship between the cap and business-as-usual emissions continues by reviewing the cap setting process. This would restore a future scarcity of emissions and allow the market to function as intended. “We need to introduce a mechanism to adjust the cap to changes in the baseline to better reflect updated Business-as-Usual assumptions, in some widely understood and predictable manner, so as to avoid the need for ad hoc adjustments in the future. This could be a process of deliberate decisions by the authorities. Such decisions would most practically be taken through Comitology; this would have to be underpinned by a transparent process including adequate stakeholder consultation and could be assisted by an independent ETS Review Board, taking into account the models provided by the UK and Australia,” says the IETA in its statement.

The organisation said if the setting aside of allowances is, however,  necessary, the following conditions are key:

• banking rules are not changed. These are seen as a key provision to enable operators to optimise compliance and investment planning through time.

• allowances are removed from future auction volumes in an objective, predictable and transparent manner, accompanied by a clarification how these will be treated in a post-2020 EU climate target context.

• market participants are reassured that such interventions will not become the order of the day and supply and demand will determine the price. 

For Phase III, the European Commission has proposed a number of changes, including:

• the setting of an overall EU cap, with allowances then allocated to EU members

• more stringent limits on the use of offsets

• limited banking of allowances between Phases II and III

• a move from allowances to auctioning

Last month, EU politicians backed a proposal to withhold carbon permits from the ETS from 2013, paving the way for the Commission to intervene in a carbon market that suffers with low prices. The Commission has to make a proposal to withhold permits, which could be passed to a technical committee and subsequently would require approval by governments and parliament before it became law. While the bill is expected to be passed before July, it remains unclear whether the set-aside provision will survive as concerns have been raised regarding market intervention. Antonio Tajani, who heads the Commission's industry department, warned against such intervention: "The pricing of allowances should be left to the market. Prices would recover by themselves as soon as the economy were to pick up." However, market intervention is supported by groups across the political divide, ranging from environmental organisations to industry.