Under reforms to the EU Emissions Trading System (ETS), planned since 2014, the bloc’s member countries agreed to introduce a Market Stability Reserve (MSR) from January 2019 to absorb a massive surplus of EU emissions allowances and repair the cap and trade system on which ETS is based following years of depressed prices. The reforms are among efforts by the EU to step up greenhouse gas emissions reductions from electricity and energy-intensive installations and from airlines operating between EU countries.
As a result, the price of European carbon emissions allowances (EUAs) for December 2019 rose to a high of around €25 a tonne in September 2018, compared with a price range of between €5 and €7 a tonne in 2016 and 2017. The higher prices were driven primarily by increased buying in the futures market from market participants anticipating the removal of unallocated allowances under the MSR. The MSR is meant to take out around 550-700 million excess allowances each year for five years.
The reforms are inspiring other nations such as China and Mexico, which have signed cooperation agreements with the EU under the so-called Florence Process, an initiative that gathers international carbon experts to share experiences from emissions trading systems and pave the way for greater alignment of carbon markets worldwide. Both countries are looking to scale up existing cap and trade systems. China, the world’s top emitter of carbon dioxide (CO2) emissions, officially launched its cap and trade system covering the power sector in 2017. Mexico, the world’s tenth largest CO2 emitter, is planning to launch a pilot cap and trade system in 2019 with a view to start trading carbon on a national level in 2022. This will operate in tandem with a carbon tax launched in 2014. ...
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