The October 2014 European Council marked a turning point in the European Union’s climate policy. This meeting, attended by the leaders of the Member States, laid the foundation for more ambitious and coordinated climate action in the years to come.
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Why was—and still is—this Council so relevant?
This Council was crucial, as widely reported by the media, because it established a binding target to reduce greenhouse gas emissions by at least 40% by 2030.
However, the truly significant aspect of this European Council was the reform of the Emissions Trading System (ETS). Before 2014, that market—known as the ETS—faced several challenges, including an oversupply of emission allowances, which depressed carbon prices and reduced its effectiveness as an incentive for emissions reductions.
How were these challenges addressed?
The first step was to reinforce the Emissions Trading System, referred to as the ETS or, in the EU context, the EU ETS. In 2014, it was agreed that this ETS would become the principal instrument for achieving the emissions reduction target, and measures were adopted to strengthen its operation.
Why reinforce the ETS?
The ETS, as is well known, is a market-based mechanism that caps greenhouse gas emissions from industrial installations. Companies receive or purchase emission allowances that can be traded. As the overall emissions cap decreases over time, the price of allowances rises, incentivising companies to invest in cleaner technologies and reduce their emissions.
What measures were adopted at the 2014 Council?
To address these challenges and strengthen the ETS, the October 2014 European Council agreed on a series of key measures:
- Acceleration of allowance withdrawal: A more ambitious schedule was set for withdrawing a significant portion of existing allowances from the market, reducing oversupply and increasing the carbon price.
- Creation of a Market Stability Reserve: A Market Stability Reserve was established to absorb surplus allowances and prevent future excessive fluctuations in carbon prices.
- Strengthening of compliance measures: Measures were reinforced to ensure companies covered by the ETS complied with their obligations, thereby enhancing the integrity of the system.
- Increased transparency and accountability: New measures were introduced to improve transparency and accountability in the operation of the ETS.
What impact did these measures have?
These measures had a significant impact on the functioning of the ETS:
- Increase in the carbon price: The withdrawal of allowances and the creation of the Market Stability Reserve contributed to a gradual rise in the carbon price, making investments in clean technologies more attractive.
- Greater certainty for investors: The increased stability and predictability of the system encouraged investors to undertake long-term investments in low-emission projects.
- Improved effectiveness in emissions reduction: The higher carbon price and stricter compliance measures prompted companies to reduce their emissions more ambitiously.
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