Deep Divisions Mark the Start of EU Carbon Market Reform Talks

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(Bloomberg) — Talks about a reform of the European Union’s emissions market have kicked off with deep rifts among national governments, highlighting the challenge they face in reaching a deal by early next year. 

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The overhaul of the Emissions Trading System, proposed by the European Commission last week, will be discussed by environment ministers at an informal gathering in Dublin Friday. The review pits countries including Sweden, Spain and the Netherlands, which favor a rapid expansion of clean energy, against a bloc led by Italy, Poland and Greece, which is concerned about the cost of moving away from fossil fuels. Both camps say they have enough votes to block their opponents’ demands. 

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“I think there’s an absolute recognition that the ETS is critically important,” said Darragh O’Brien, environment minister of Ireland, whose country is chairing the meeting as holder of the rotating EU presidency. He added he will aim for an agreement on the member states’ common negotiating position on the reform in December. 

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The commission has faced mounting pressure from governments and industry groups over carbon costs after the Middle East conflict raised energy prices, exacerbating concerns over Europe’s declining competitiveness compared with China and the US. To help secure backing for the reform, the EU sought to strike a balance in its proposal between lowering the burden of the transition for industry and encouraging those who decarbonize faster to keep investing in Europe.  

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Still, for governments including Sweden and Finland the proposal is not strong enough. Earlier this month, the countries teamed up with Denmark, the Netherlands, Portugal, Luxembourg and Spain to call for ensuring an ambitious emissions-reduction trajectory and long-term investment predictability. 

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“Sweden is frustrated and we’re criticizing the proposal,” Daniel Westlen, Swedish state secretary for climate and the environment, told reporters in Dublin. “It’s rewarding those that didn’t do their homework and didn’t do what they need to do to phase out fossil fuels.” 

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Launched in 2005, the ETS imposes gradually shrinking emissions limits on around 10,000 facilities in sectors from steel and cement to fertilizers. The recalibration of the system is aimed at adjusting it to the EU 2040 goal of cutting carbon emissions by 90% from 1990 levels and reaching climate neutrality by the middle of the century.

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Earlier this week, the first meeting of ambassadors to discuss the reform on Wednesday in Brussels showed that member states are at odds over key elements of the proposal, including the pace at which the pollution limit for companies under the ETS shrinks every year, according to people with knowledge of the issue. Other sticking points include free carbon permits for industry, imported credits and the use of revenues from government auctions of emissions permits.