May 05 2016

Which EUAs to monetise for ETS Innovation Fund, and when should the proceeds first be awarded?

***UPDATE 13 Sept 2016: MEPs have noticed Change Partnership’s idea — see below.***


Fredrick Federley, in his amendment 22, proposes using 150 M more EUA (EU Emissions Trading System Allowances) for ETS Innovation Fund than the 450 M EUA proposed by the European Commission. His extra EUAs would be ‘Phase’ 3 ETS allowances (i.e. related to reaching the 2020 target of a 20% cut in CO2 emissions) that have not been released to emitters so far.

He has support for this position from ZEP and Alstom, who called on the EC in their response to the March 2015 ETS Review public consultation, to “monetise free allowances from the NER non-allocated in 2020 and free allocations allocated to plants that will close before 2020”. He has Shell‘s support, too. Shell would like to create an ‘allowance pool’ that could contain allowances “from within the Market Stability Reserve (MSR) [and] the remaining [un-allocated] allowances at the end of each ETS phase”. These would be monetised “in tranches properly sized to maintain the necessary supply”. TVU says something similar. (See ‘When is the right time to monetise allowances’ for more)

But Eurelectric and four others from the electricity industry are opposed. They say, “in order not to undermine the Market Stability Reserve (and functioning of the ETS), it is important that the Innovation Fund (NER400) is fed by phase IV allowances, and that all unallocated allowances from phase III go directly to the MSR.” The CCSA, Alstom and IETA also eye up the “significant amount of funding returned to EU institutions as a result of successful NER300 applicants not taking projects through to delivery. This funding is readily available and would not further impact on the ETS market as allowances have already been monetised.”

Having your cake and eating it?

ZEP and Alstom also suggest “Without being monetised, allowances from the ETS could be used as collateral at an agreed carbon price.” Bellona explains the idea as follows “A ‘guarantee fund’ should be set up to guarantee targeted support for CCS in cases where the EUA price falls below a minimum threshold – a determined ‘strike price’ – and therefore the NER400 fails to deliver the necessary funding.” Scotland Europa and CCSA have a different name for the process: ‘backstopping’. The original promoter of the idea is the NGO Change Partnership, which did not make a contribution on the topic of NER400 to the public consultation, or if it did, it was not published.

S&D MEPs in the Environment Committee of the European Parliament put forward an amendment supporting Change Partnership: “The leveraging can take the form of future contracts based on an anticipated CO2 price of 30 euros/t by 2030 and guaranteed/refundable by the ECB.” (409)

  1. NER400.com’s comment

    The approach carries some risk for the carbon market. If carbon prices are high and so is demand for EUAs, the mechanism will keep prices high. If carbon prices fall and the guarantee fund must be called upon, the effect of the guarantee fund will be to drive prices lower. It is a source of volatility. Many contributors call for a schedule published well in advance for when exactly allowances will be monetised (said by TVU & Shell above and see ‘When is the right time to monetise allowances’).

More NER300-like funding before 2022?

At the time that the public consultation was running, an agreement was being finalised between the EC, European Parliament and Member States on the MSR. The possibility of an early start to ETS Innovation Fund or of another round of NER300 using allowances from the MSR was felt quite keenly by the stakeholders. Indeed, the European Parliament’s proposed amendments in that regard were eye-catching (see article from March 2015).

Ocean Energy Europe called “on the Commission to take the necessary steps for the renewal, before 2020, of NER300 or a similar instrument that has the same focus and encompasses renewable energies.” ZEP, CCSA and IETA made the same request. ROAD (the Netherlands’s flagship CCS project) said, “The Innovation fund should start as soon as possible and not in 2021. In fact, some projects should already be operational in 2021.”

Their message was taken up by the UK, with DECC (the UK ministry responsible for NER300) calling on the EC to consider “an early start to the application and award process for a limited number of projects that might be up and running and ready to receive operational funding as soon as the first allowances are monetised in 2021.” Scotland Europa says the fund “should be open for application in 2017 to allow its release in 2018.”