Dealmaker or Dealbreaker? What an 8-Month Deadline Means for ETS Negotiations

CFP Energy and carbon market analysts, Veyt, recently presented to ETS operators focusing  on the subject of 'Ambition or Compromise: What the EU ETS review means for carbon markets and industry'.

In case you missed it, we're publishing a series of insights examining the key themes and insights that emerged.

First up, we discuss what we've seen so far in the negotiations, and what the ambitious target to conclude negotiations by the end of Q1 2027 means for the process.

A tight ETS deadline

If the EU legislative process is known for anything, it's not how fast it moves. The last big ETS reform, 'Fit for 55', took 18 months to reach an agreement.

This time, the EU institutions have agreed to target an agreement by the end of March next year.

That gives just 8 months from the Commissions initial proposal back in July.

That deadline seems to have been chosen to avoid negotiations dragging on into a period of consequential elections across EU Member States.

These kick off in April when voters in France go to the polls to elect a new President. One of the key powerbrokers in the EU will have a new leader, and based on current polling it will be the anti-Green Deal Marine Le Pen.

Agreeing an ETS deal before then avoids a whole lot of complication.

The long and winding road

EU legislative process takes time because it's complex.

In a nutshell:

The European Commission presents a proposal.

The European Parliament (elected politicians) and Council (heads of state and representatives) go through their own internal negotiations to agree their negotiating position.

The three institutions enter ‘trilogue’ negotiations to agree an overall position.

This position requires final approval via votes in Parliament and Council before it can begin implementation.

Where have we got to so far?

Here's an animated timeline of what's to come for the ETS.

The Commission presented their proposal on 17 July, right before the summer recess.

The Parliament lead on the file ('Rapporteur'), Peter Liese, wasted no time in presenting his first draft proposal of a Parliament position almost as soon as they returned from summer. MEPs have until 6 October to suggest amendments, and the target is a final vote in mid-December.

Meanwhile in the Council, actual policy positions have been slower to emerge but we have a clear indication of the voting coalitions are starting to form.

On one side we have 'gang of ten' calling for loosening and industry support, led by countries like Poland and Italy.

On the other, there's coalition of countries including the Nordics, Netherlands, Spain and Portugal, pushing for more climate ambition.

In the middle there's France and Germany - the Council vote requires support from countries representing 65% of the EU population, so these large countries act as power brokers. And this is why the French election is so important.

Over the next few weeks policy positions will start to emerge in a series of meetings held by ambassadors, Environment Ministers and Heads of State.

Ireland currently has presidency of the Council, and is targeting 11 December for agreement on a final position.

So what next for the ETS?

The tight timeline is not only putting pressure on the institutions to get moving. It also seems to be influencing the policies themselves.

The Commission's proposal was expected to be ambitious, and then watered down by Parliament and the Council. This is still the general dynamic, but aspects of the Commission's proposal were more generous than expected: a lower Linear Reduction Factor after 2035, greater flexibility from removals and international credits, aviation extension only within 5000km of the EU etc.

Was this a 'pre-compromise' to enable negotiations to run more smoothly?

We've also seen the time pressure reflected in the narrower focus of Parliament and Council discussions so far.

As many expected, the issues directly impacting industry are receiving a lot of attention: free allocation, revenue use, price volatility.

But some issues expected to be controversial have so far avoided too much attention: inclusion of waste incineration, expansion of maritime and aviation, the role of international credits.

Is this a sign that the intense time pressure will result in a smaller number of issues being focussed on?

A long journey ahead

These negotiations are far from a done deal.

Agreement to work towards this accelerated timeline does not mean it's guaranteed to be achieved...

But it's a crucial dynamic to consider when watching the negotiations going forward.

And it has real implications for the market.

As we pass this year's compliance deadline, policy headlines are likely to become an ever more important driver of market dynamics. This is where CFP Energy can support you and your ETS strategy. 

Our team analyses and communicates the impact of policy change on ETS pricing, providing clients with market opportunities and cost effective solutions to carbon compliance.

Working with CFP Energy ensures your access to exclusive insights including weekly market updates and private webinar presentations detailing market changes and expected impacts.

Learn how we can support your compliance strategy by getting in touch with a member of our team, here.