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A strong revision of the EU ETS, but the future may bring impetus for further reform

The ETS will be much stronger after the Phase 4 revision. But further adjustments may be inevitable in the future, given ongoing developments in the climate/energy world. In the wee hours of November 9th, agreement1 was reached in a trilogue session between the European Parliament and the Council over the European Commission’s proposed revision of the EU emissions trading system (EU ETS), bringing to an end nearly two and a half years of political talks. The agreement on the Phase 4 (2021–2030) legislation significantly strengthens the functioning of the EU ETS, even if some of the improvements will take time to materialise. It also marks a step in a process of ongoing EU ETS reform: The initial proposal by the European Commission of July 2015 was released only a few months after the deal on the Market Stability Reserve (MSR) was reached, which in turn was conceived only shortly after an ad-hoc deal on ‘backloading’ allowances was struck.

The ongoing reforms of EU climate policy reflect the precarious balance between environmental ambition and the demands of the political economy facing policy-makers and stakeholders. Yet, it is conceivable that 2018 could be a rare year – and the first during the third trading phase (2013-2020) – in which EU legislators are not discussing the reform of the European carbon market. How long will this lull last? In the end, much of the discussion in recent months between the Council, Parliament and Commission centred around a simple, specific and highly political point: Can funds generated by the sale of ETS allowances and earmarked for aiding the transition to cleaner energy systems in lower-income member states be spent on coal-fired power plants? The answer is a qualified no.

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