EU Nations Reach Deal to Start Carbon-Market Reserve in 2021

European Union member states agreed on a compromise to seek the start of automatic supply cuts in the world’s biggest carbon market in 2021.

The deal, approved this week in Brussels, allows EU governments to begin on March 30 negotiations with the European Parliament about the final version of the draft law on a market stability reserve. The reserve would ease a glut of permits that has pushed emission allowances down about 75 percent since 2008 to levels that fail to deter industry from burning coal, the most-polluting fossil fuel.

The agreement includes a provision to transfer permits delayed at government auctions in 2014-2016 into the reserve, preventing their return to the market in 2019-2020. The postponed, or backloaded, allowances account for almost half of the average annual pollution limit in the EU cap-and-trade carbon program.

The draft law on the reserve needs qualified-majority support from national governments and majority support by the European Parliament to be approved or amended.

The reserve would automatically absorb carbon allowances in the EU emissions-trading system, or ETS, if the surplus exceeds a fixed limit, and release them to the market in the event of a shortage. The glut swelled to about 2.1 billion permits last year, according to EU estimates.