The European Union should strengthen a mechanism to prevent excessive carbon price spikes as part of the deepest reform of its emissions trading system, according to a proposal by France, which chairs member states talks about the measure.

The holder of the EU rotating presidency asked national governments to endorse key parameters of the carbon market overhaul that was proposed by the European Commission in July last year, according to a document seen by Bloomberg News. France is attempting a compromise that would ensure companies avoid sharp moves in carbon prices as member nations sign off on a plan for greater pollution reductions.

As part of a massive package to align the economy with stricter climate goals, the EU Commission wants to deepen emissions cuts in the cap-and-trade program to 61% by 2030 from 2005 levels. The plan helped drive carbon prices to a record near 100 euros ($105) per metric ton earlier this year, prompting several EU countries to demand better protection while energy-intensive industries were concerned about their global competitiveness.   

The reform of the Emissions Trading System needs approval by the European Parliament and by member states in the EU Council. While the EU assembly aims to decide about its negotiating stance in a vote next week, France wants environment ministers to agree a common position at their meeting on June 28. The final shape of the overhaul will be decided in talks involving the parliament, national governments and the European Commission.

In preparation for the ministerial gathering, ambassadors from EU members are first due to discuss the French proposal on Wednesday. The details of the strengthened price controls mechanism would be debated at the final stage of the talks, most likely when ministers meet in Luxembourg later this month, according to the document sent to national governments.

The French proposal does not include any provisions to restrict financial investors’ access to the market. Such measures were earlier proposed by lawmakers in the European Parliament, triggering concerns by the International Emissions Trading Association and warnings by the European Commission.

Pollution Caps

Under the plan, the EU Council would endorse raising to 4.2% from the current 2.2% the rate at which pollution caps in the market shrink each year. Known as the Linear Reduction Factor, it would apply a year after the proposed reforms are implemented. It would be complemented with a one-time emissions cap reduction of 117 million allowances, known as rebasing.

Member states would also back the Commission’s changes to the Market Stability Reserve, a key tool that withholds excess pollution permits which weighed on EU carbon prices for most of the past decade. They include approval to maintain the percentage of permits taken into the reserve from the market to stay at 24% until 2030.

The Council would support a plan to phase out free carbon permits in sectors that are covered by a planned levy on emissions on goods that are produced outside the EU, which would make it compatible with World Trade Organization rules. Free allocation, currently aimed at preventing relocation of businesses to regions with less stringent climate policies, would be reduced over a 10-year period, falling 10% each year from 100% at the end of 2025. 

Those permits would instead be auctioned, and France wants to use the funds to help exporters in the sectors covered by the Carbon Border Adjustment Mechanism deploy innovative technologies. In addition, the Commission would be obliged to regularly assess the impact of the mechanism on the risk of carbon leakage, including in relation to exports, and propose new measures if needed.