ETS reform: everything you need to know in a nutshell 

The Parliament is working on making the EU's emissions trading scheme more efficient © BELGA_AGEFOTOSTOCK  

The EU's emissions trading scheme (ETS) was set up to reduce gas emissions and fight climate change, but it is not working as efficiently as it could be. MEPs discuss on 7 July an informal deal with member states to reform the scheme and will then vote on it the following day. The legislation would tackle the imbalances of supply and demand of emission allowances, which is holding back investment in green technologies. Read on to find out what the reform is all about.

About ETS

ETS is a tool to reduce industrial greenhouse gas emissions. Power plants, air lines and other companies can buy or sell emission allowances, which are permits to pollute at a price that is meant to encourage them to pursue energy savings and carry out  emissions-reducing measures. Each allowance grants its owner the right to emit the equivalent of one tonne of CO2.

The problem with the current scheme

At the moment these permits are very cheap, because demand for them dropped due to the economic crisis while the supply has remained constant. By 2013, there was a surplus of around two billion allowances compared to actual emissions, which if nothing changes could increase to more than 2.6 billion by 2020. Having a large surplus discourages companies from investing in green technology, thereby hampering the scheme's efficiency in combatting climate change.

What already has been done to improve the situation

In July 2013 MEPs approved plans to allow some allowances due to be auditioned in 2014-2016 to be sold later in 2019-2020. However, this measure known as backloading is only a temporary fix.

The reform to improve the scheme

The idea behind the reform is to create a market stability reserve. If  the surplus of allowances exceeds a certain threshold, then allowances would be taken off the market and placed in the reserve to avoid imbalances in the market. If needed, the allowances can be returned to the market

Under the informal deal a market stability reserve would be set up at the start of 2019,  instead of in 2021 as originally proposed by the European Commission. Meanwhile, backloaded and other allowances unused by 2020 will be kept in the reserve instead of being taken to the market.

This week

MEPs will discuss the informal deal with the Council on Tuesday afternoon and vote on it on Wednesday.