EU countries back carbon market changes to curb price spikes, diplomats say

By Kate Abnett

BRUSSELS, Sept 23 (Reuters) - European Union countries agreed on Wednesday to keep more spare CO2 permits in the bloc's emissions trading system (ETS), to try and avoid spikes in carbon prices, according to EU diplomats and a document seen by Reuters.

The plan, first proposed by the European Commission in April, is part of the EU ​response to a surge in fuel prices triggered by the Iran conflict, which has left governments scrambling for ways to curb energy bills.

The ETS is the bloc's main climate change policy, and is not the main reason for Europe's rising energy prices  – but the changes agreed on Wednesday respond to requests from governments including Poland and Italy to curb the ETS's contribution ⁠to electricity costs.

EU countries' ambassadors agreed in a closed-door meeting to stop removing excess CO2 permits from the market, as is currently done, two EU diplomats told Reuters.

Instead, spare CO2 permits would be retained in a special "market stability reserve" as a supply buffer that could be released into the ETS market to counter price spikes.

The ETS obliges big polluters like power plants and factories in Europe to buy permits to cover their CO2 emissions, and trades ​spare carbon permits in a market where their price fluctuates daily. 

At present, if there are more than 400 million CO2 permits in the market's stability reserve (MSR), the excess is deleted. The MSR is designed to release 75 million extra permits into the ETS, if the EU carbon price more than doubles.

Countries agreed that no spare CO2 permits will be cancelled until 2030, according to a draft of their agreement seen by Reuters.

From 2031, if there are more than 800 million permits in the MSR, the excess will be cancelled. This threshold will then decrease each year.

EU countries will now negotiate the final rules with the European Parliament, before they take effect.

On average, the ETS contributes 11% to EU industries' electricity bills, although in countries with fossil fuel-heavy power mixes like Poland it is far higher. It is lower in countries with large amounts of low-carbon nuclear and renewable energy, like Sweden.

(Reporting by Kate Abnett; Editing by Andrew Cawthorne)