FEANTSA Response to the Market Stability Reserve Compromise Amendment

The compromise amendment for the Market Stability Reserve reform of the ETS2 (MSR2) by Rapporteur Danuše Nerudová was adopted by the ENVI committee of the European Parliament yesterday. The amendment follows an initial proposal made by the Commission on enhancing the Market Stability Reserve (MSR), the mechanism that serves to control carbon price levels in the upcoming EU emission trading system for the road transport and buildings sector (ETS2). The Commission proposal was the answer to resistance against adopting the ETS2 and a call by Member States to introduce better safeguards against high price levels.   

The ENVI committee compromise amendment mitigates the initial controversial proposal by the Commission to remove the so-called “sunset clause” – the cancellation of unused allowances from the MSR. The compromise proposal suggests cancelling 50% of the MSR2 reserve in 2034 and the remainder in 2036, as well as an impact assessment on the MSR2 by 2032.  

To compensate for the thus weakened price signal and safeguard EU climate targets, the compromise amendment includes a strong emphasis on complementary policy, additional social safeguards, as well as an impact assessment:  

1. Complementary decarbonisation measures  

Recognition of the green funding gap, better monitoring and funding for complementary decarbonisation measures, recognising that fuel demand in buildings and transport is largely inelastic in the short term:  

• “In order for the amendments to not hinder the Union’s decarbonization efforts, further action by the Member States is necessary. According to the European Central Bank, green investment in the Union remains below the levels required to meet the 2030 decarbonisation target. Therefore, Member States need to remain vigilant against the risk of a green funding gap.” (Recital 3)
• “it is necessary that the Commission complements its analysis of the final updated National Energy and Climate Plans by identifying, for each Member State, sectoral decarbonisation measures and a better use of ETS revenues that could help reduce the demand for ETS2 allowances.” (Recital 3a) 
• “It is also important to [strengthen] the EIB Frontloading Facility and the budget of the Social Climate Fund to ensure that financial support is provided to households in a timely manner and at a level that reflects the evolution of the ETS2 prices”. (Recital 3a)  

2. Additional social safeguards  

Possible exemption of the building sector and possibility to use ETS2 revenues for direct income support regardless of environmental impact: 

• Member States that have transposed the EPBD and that demonstrate that they are able to meet their effort sharing targets by other measures, may be allowed by way of derogation to temporarily not apply the system to residential buildings. Those options need to be duly assessed with regard to their social and environmental impacts by 1 March 2027. (Recital 6a (new)) 
• ensuring the possibility to use revenues from emissions trading for a direct support without having to prove a positive environmental impact or introducing other measures to minimise the cost passed through on vulnerable households. (Recital 6a (new)) 

Impact assessment of the ETS2, the Social Climate Fund (SCF), and the Frontloading Facility: 

• impact assessment of the ETS2 “in which it will assess its social impact and its impact on meeting the climate goals, as well as a distributional assessment of the number of vulnerable households for which support has been made available from the Social Climate Fund and the Frontloading Facility by that date, including, as feasible, a breakdown by type of geographical area, by income distribution and by gender which should also consider additional measures to ensure both environmental integrity and social fairness within the ETS2.” (Recital 6b (new))  

FEANTSA Assessment:  

Vulnerable households do not have the capacity to react to a price signal, and their decarbonisation efforts need to be supported with funding instead of enforced by high price levels. This is a key point that FEANTSA has been emphasising from the beginning of the extension of the emission trading system to the buildings sector. The recognition in the compromise amendment of the low price-elasticity in the buildings sector has been already established in previous studies, for example by the European Climate Foundation. To improve the amendments, FEANTSA highlights that: 

1. The green funding gap needs to be assessed with a differentiation of household financial capacity – the lowest income deciles need grant funding while households with higher income levels can be incentivised into co-financing. This creates not only an important qualification for the type of policy instruments needed, but also for the assessment of the total amount of funding necessary. The Commission should monitor whether Member States follow their obligations of using EU funding for vulnerable households as is stated in the Energy Efficiency Directive Article 24(3) (see next point). 
2. The analysis of the final updated NECPs from the perspective of sectoral decarbonisation is welcome, but it also needs to include an assessment of the share of vulnerable households supported with ETS revenues (and other EU funding). The assessment should enable the Commission to monitor the spending obligations Member States have for vulnerable households and households in energy poverty as spelled out in the relevant paragraphs of the EED (article 24(3)) and the ETS Directive (article 30(d)6). 
3. Strengthening of the EIB Frontloading Facility in and of itself will not secure support for households that cannot react to the price signal – the Facility needs to be targeted to the objectives of the SCF.  
4. To strengthen the SCF and make it responsive to the carbon price levels, it needs to be uncapped and extended beyond 2032. With the new control mechanisms of carbon pricing, uncapping seems to be a less relevant demand now, but the extension beyond 2032 remains important. 
5. Exemption of the buildings sector and alternative to ensure building decarbonisation by the EPBD and the ESR – it is difficult to assess what would happen if countries with significant emissions in the buildings sector, such as Germany or Poland, opt for this the demand for allowances, and therefore the price level and the revenues of the system would drop significantly, potentially risking the SCF reaching its cap. The argument for such an exemption would be relevant in countries that do not have any functioning system in place to provide targeted compensation and support for the most vulnerable households (see also next point). However, exempting the buildings sector might add uncertainty of carbon price levels in the transport sector, which again might negatively impact vulnerable households.  
6. Direct income support is already an option in the ETS Directive (article 10(3)hb). However, as multiple organizations have demonstrated, a universal direct payment scheme going to all households (“citizen dividend”) does not make ETS2 progressive – income support needs to be targeted. 
7. We strongly support conducting an impact assessment of the ETS2, the SCF and the Frontloading Facility. The impact assessment should give clear indication of the green funding gap for vulnerable households and households in energy poverty and show the share of vulnerable households that have not been supported by any of these revenues and therefore need targeted support from other sources, including the next MFF.