Latvia, the current holder of the EU Presidency, has officially presented a Market Stability Reserve (MSR) proposal to the Member States participating in the EU Emissions Trading System (EU ETS). The carbon market reacted nervously to this development, resulting in prices dropping to a low of €6.28 on the front December contract, the lowest price seen this year. Carbon traders have been hesitant to take or hold long positions due to the ongoing uncertainty surrounding the MSR negotiations.
The proposal put forward by Latvia is weaker than the one presented by the ENVI committee, as it was necessitated by a blocking minority formed by eight countries, led by Poland, which possess enough votes to impede further progress without a compromise on EU ETS reform.
The key points of the new proposal are as follows:
Start Date: The MSR would be established in 2018, but the withdrawal of EU Allowances (EUAs) from the market would only become operational in 2021. This coincides with the original start date proposed by the EU Commission and is likely aimed at addressing Poland's objections to an earlier start.
Backloaded Allowances: Backloaded allowances would be immediately placed into the reserve in 2018 and would not return to the market in 2019/20. This is considered one of the main factors driving future bullish prices, along with the withdrawal of unallocated allowances.
Unallocated Allowances: The Latvian proposal calls for the EU Commission to assess what should be done with the unallocated allowances. Although the proposal does not rule out putting them into the MSR, it calls for the EU Commission to formulate a position. Both the backloaded allowances and unallocated allowances are expected to be significant price drivers.
Carbon Leakage: The Latvian proposal rejects the carbon leakage provision in the ENVI proposal. Instead, it recommends that this aspect be addressed as part of a broader review of the ETS Directive scheduled for June.
The proposal will be discussed at a working group meeting on March 16th. The carbon market will closely monitor any developments and signs of compromise that may arise.
