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increasing the cost of greenhouse gas emissions

For Phase IV, the EC also proposed increasing the rate of reduction after 2020 to 2.2% per year, in line with the 40% domestic greenhouse gas reduction target for the EU by 2030 (relative to 1990). It proposed auctioning 57% of a total 15.5 billion allowances available under the ETS cap for 2021-30, leaving 43%, about 6.3 billion, for free issue. The 57% is the same as in 2015. The original ETS directive envisaged the free allocation of allowances to diminish to zero in 2027. Analysts expect the ETS carbon price to reach at least €20 by 2020 and €30 by 2030. In February 2017 the European Parliament voted in favour of the EC’s proposed revisions to the ETS from 2020, strengthening the market stability reserve (MSR), cancelling 800 million allowances in 2021 and supporting a 2.2% annual cap reduction. Subject to EU Council approval, this means the MSR will withdraw 24% of the surplus each year for four years instead of the EC’s originally proposed 12% per year rate. European power industry group Eurelectric said the vote was “an important step towards strengthening the EU ETS and delivering a stronger carbon price in the short and medium term.”

The shift from free allocation to auctioning of emissions allowances, as well as the tightening of emissions allowance caps, will benefit nuclear energy and other forms of low carbon generation. Although it is thought that the cost of emissions allowances has already been incorporated as an opportunity cost, the free allocation of allowances means that fossil fuel power plant operators have not faced a true cost themselves for much of the emissions of their plant. In particular, when new electricity generation capacity is considered, fossil fuel generation will have to incorporate the cost of carbon allowances into the economic assessment of the plant. In addition, the tightening allowance cap is likely to lead to higher allowance prices, increasing the cost of greenhouse gas emissions