EU countries consider options to avoid carbon market fundraising plan

By Kate Abnett

BRUSSELS (Reuters) - European Union countries are considering alternatives to an EU plan to use a carbon market reserve to help finance their exit from Russian gas, as some fear the proposal would undermine the bloc's main climate change policy.

The European Commission published plans in May to end the EU's reliance on Russian gas this decade, including a proposal to raise 20 billion euros ($20 billion) by allowing countries to sell carbon permits stored in the Emission Trading Scheme's (ETS) "market stability reserve".

The reserve began operating in 2019 to tackle a problem of oversupply that for years weighed on carbon prices.

Denmark has put forward a counter-proposal to the Commission's plan that it says treats the carbon market like a "printing press" for money, rather than the bloc's core tool for cutting greenhouse gas emissions.

"This risks undermining the hard-earned trust of the market in the ETS as a credible, rules-based instrument to deliver the EU’s climate targets cost-effectively," said the proposal, seen by Reuters.

Diplomats discussed Denmark's plan on Thursday. Some said roughly a dozen countries have expressed support for it.

Since the stability reserve took effect, carbon permit prices have strengthened significantly, reaching a peak of nearly 100 euros a tonne early this year.

But they dropped by 10% on the day Brussels published the funding plan, and some nations fear the proposal would cause a prolonged price drop - making it cheaper to pollute and ultimately reducing their funds for green investments. Carbon market revenues go into national governments' budgets.

Denmark proposed raising cash instead from the EU Innovation Fund - an existing pot of carbon market revenues that, under planned ETS reforms, is set to increase in value this decade.

The Commission has said its proposal would be done in a way that "does not disrupt the market" and any extra surplus caused in the carbon market would be re-absorbed by the reserve in future years.

($1 = 0.9995 euros)

(Reporting by Kate Abnett; editing by Barbara Lewis)