Netherlands warns against EU carbon market fundraising plan

The Netherlands has warned other European Union countries that an EU plan to use a carbon market reserve to finance their exit from Russian gas would undermine the bloc’s climate change policy, and put forward alternative plans.

As part of its aim to end Europe’s reliance on Russian gas this decade, the European Commission has said countries could raise 20 billion euros ($19.80 billion)for new energy investments by selling permits stored in the EU carbon market’s “market stability reserve”.

Countries including The Netherlands, Germany and Denmark have opposed the idea, warning that toying with the market reserve could undermine trust in the bloc’s main climate policy, and depress the EU’s carbon price – risking an increase in emissions if this made it cheaper to pollute.

“It is of the utmost importance to preserve the integrity of the ETS (emissions trading system) Market Stability Reserve,” the Netherlands said in a paper, seen by Reuters and drafted ahead of negotiations with other EU countries on the policy.

The EU carbon market forces power plants and factories to buy CO2 permits when they pollute. Carbon permit prices have soared in recent years, but they dropped by 10% on the day Brussels published the funding plan.

The Dutch government suggested raising 10 billion euros instead by selling 125 million carbon permits, half of them by pulling forward the sale of permits due to be sold later this decade.

The other half would be permits taken from an “innovation fund” designed to support green technologies – an idea previously suggested by Denmark.

The Commission has said any extra surplus caused in the carbon market by its proposal would be re-absorbed by the reserve in future years. The reserve began operating in 2019 to tackle a problem of oversupply that for years contributed to rock-bottom carbon prices.

But some EU diplomats remain wary of changes that could undermine recently-built confidence in the market, and one warned against using the carbon market as a “piggy bank” for other political purposes.