Phase III (2013 to 2020)
In Phase III, the EU Commission set an overall EU-wide cap on CO2 emissions for the first time. This amounted to 2.08 billion metric tons of CO2 for 2013 and has been reduced by 1.74 percent annually since then. Fixed CO2 limits per kilogram were set for the production of certain products, so-called benchmarks: the production of 1 kg of steel may thus generate a maximum of 1,328 g of CO2, while 766 g of CO2 may be produced per kilogram of cement. Anything in excess of these quantities must be purchased in emissions allowance trading.
Phase III also marked the transition from the distribution of CO2 certificates to their auctioning: since 2013, twenty percent of CO2 certificates have already been auctioned off, and this figure is set to climb to 100 percent by 2027. Originally, this quota was planned for 2020 already, but the European Council watered it down significantly, not least by the German Federal Government. Deviating from this course, electricity producers have had to purchase all the certificates they need on the market since 2013. To date, some Eastern European countries with a high proportion of coal-fired power generation have been exempt.
The revenues from emissions allowance trading, which have since risen to double-digit billions successfully, are paid out to the member states on the one hand, and transferred to an EU climate fund on the other hand.
Phase IV (2021 to 2030)
For Phase IV, the main aim is to expand and continue the developments initiated in Phase III. In view of the stronger-than-expected global warming, the linear reduction factor for the volume of climate certificates issued increased from 1.7 to 2.2 percent per year - according to the German Environment Agency, however, at least 2.6 percent are required to meet the climate targets by 2030.
Introduction of the Market Stability Reserve
The Market Stability Reserve, also known as MSR, is a reform measure decided by the EU Commission in the course of negotiations on Phase IV of the ETS. It was introduced on January 1, 2019 and is intended to counteract a price decline on the emissions allowance market through an active shortage of emission allowances. This is expected to reduce existing surpluses and avoid the build-up of new overcapacities.
In practice, the market stability reserve intervenes in emissions trading if the market volume falls below or exceeds the tolerance range of 400 to 833 million certificates. In the event of a shortfall, additional certificates are placed on the market; in the event of a surplus, certificates are withdrawn from the market and transferred to so-called MSR funds.
As an enormous surplus of CO2 allowances has built up in recent years, which has been passed down to the next year and thus increased from year to year, the Market Stability Reserve is currently primarily effective in the withdrawal direction: Between 2019 and 2023, 24 percent of the market surplus from the previous year is to be withdrawn each year and added to the MSR funds. Beginning in 2023, the MSR will be limited to the auction quantities of the respective previous year, and all remaining allowances in the MSR funds will be discarded. This aims at preventing a “parking” of emission allowances in the MSR funds, as those “parked” allowances could possibly later be called up and thus lead to emitting CO2 – which would counteract the objective of the measure.