EU adjusts carbon market reserve to avoid volatile prices

By Kate Abnett

BRUSSELS, April 1 (Reuters) - The European Commission proposed tweaks to the EU's emissions trading system on Wednesday to try to avoid volatile carbon prices, after pressure from governments including Italy to amend the system to curb soaring energy prices triggered by the Iran war.

The EU proposal, previously reported by Reuters, would end the automatic cancellation of excess carbon permits in the ETS, so that spare ​permits are kept in a special reserve as a supply buffer, which could be released in future ​if carbon prices spike.

At present, if there are more than 400 million permits in the ETS "market stability reserve", the excess is invalidated.

That system had cancelled 3.2 billion excess permits by 2024, but annual cancellations were expected to tail off in the coming years, as the EU designed the supply of emissions permits to tighten over time, to ensure emissions decrease.

"We are keeping more allowances in reserve than previously foreseen in order to enable us to better manage possible price volatility in the future," a senior EU official said.

"We are serious about keeping prices stable," they added.

The benchmark EU carbon contract price increased after the Commission's announcement and was trading at around 74 euros per metric ton of CO2 on Wednesday afternoon, buoyed by Brussels avoiding bigger changes to the ETS.

"It is little more than being seen to do something without actually doing all that much," said Trevor Sikorski, head of gas and emissions analysis at Energy Aspects, of the proposal.

The MSR is designed to release 75 million extra permits into the ETS, if the EU carbon price is 2.4 times higher than in the two preceding years - a system unchanged by Wednesday's proposals.

Launched in 2005, the ETS is the EU's main policy to ​reduce CO2 emissions, which it does by forcing around 10,000 power plants and factories in Europe to buy permits to cover their emissions.

This cost ⁠makes up around 11% of EU industries' electricity bills - and has prompted calls from leaders including Italian Prime Minister Giorgia Meloni to suspend the ETS for power plants, to curb surging energy prices triggered by the Iran war.

Other governments, including Sweden and the Netherlands, oppose major changes which they warn could undermine Europe's main tool to tackle climate change.

Brussels will propose a bigger overhaul of the ETS in July, to redesign the system for the next two decades. The senior EU official said this could include prolonging the free CO2 permits industries currently receive to help them compete internationally.