EU Member States Sign Off on Short-Term Carbon Market Fix

16 January 2014

EU member states signed off last week on a plan to withhold as many as 400 million carbon allowances from its Emissions Trading System (ETS) this year, in a move geared at propping up the bloc's struggling carbon market until a long-term solution can be found.

The Climate Change Committee's vote last Wednesday, where all 28 EU member states were represented, marked the final stage in a process that began well over a year ago, when the European Commission first submitted its so-called "backloading" proposal.

The regulation aims to address the overwhelming glut of carbon permits on the EU market, which has caused the prices of such allowances to plummet in recent years to an average of less than €5 per metric tonne - far below the ideal levels for fostering investment in renewable technologies and moving away from carbon-intensive energy sources.

According to the terms of the backloading regulation, 900 million allowances would be withheld from auction from the years 2014-2016. These would then be reintroduced in 2019 and 2020.

Exactly how many permits are withheld in 2014 will depend on the quarter in which the implementation of the proposal begins. For instance, 400 million allowances could be withdrawn this year if the implementation process is done by the end of March. If implementation starts between April-June, this number would fall to 300 million.

Uncertainty around the final timing hurdle has prompted divergent carbon market forecasts. Some estimates, including those compiled by Bloomberg New Energy Finance, suggest that backloading the permits could raise their price to an average of €7.5 this year. On the other hand, a survey by Reuters indicated that 10 analysts had lowered their forecasts for EU carbon permit prices in 2014 to a €5.35 average.

The Commission has asked that backloading begin as soon as possible, and is therefore urging the European Council and European Parliament to shorten the "scrutiny period" for the regulation - traditionally three months - in order for implementation to begin by late March.

2030 framework

The unveiling of the EU's highly-anticipated 2030 climate and energy framework - due out next Wednesday - is expected to intensify the debate over how to make the EU ETS, a key part of the bloc's climate strategy, sustainable in the long-term.

Critics and supporters of backloading both agree that postponing the auction of these permits is not enough to deal with the carbon market's failings, and officials have widely called for a deeper structural reform of the cap-and-trade scheme.

"While backloading will help stabilise the carbon market in the coming years, we must tackle the more structural challenges," EU Climate Commissioner Hedegaard said, promising that the Commission would address these questions in the 2030 proposal.

The EU's executive arm has also emphasised the importance of an ETS solution in order to avoid national tax-based policies and a fragmentation of the single market. An ETS emissions cap sets a reduction goal of 21 percent by 2020 compared with 2005 levels.

At the start of the public consultation on the 2030 framework last March, the Commission proposed a 40 percent greenhouse gas (GHG) reduction goal, in order to put the trading bloc on track towards slashing GHG emissions between 80-95 percent by 2050.

In a "Trends to 2050" report released over the end-of-year holidays, however, Commission research found that the bloc is only likely to reduce its emissions by a third in 2030, and by less than half in 2050.

The legislative process for establishing 2030 targets is expected to take at least a year. Speculation over what the Commission's recommendations for these targets might be has intensified in recent weeks, with the Financial Times reporting that EU commissioners have been considering a series of options, such as scrapping the renewables target, or seeking a compromise in making it non-binding.

Concerns over energy prices have played into the debate. European utilities last year called for a dramatic re-think of the bloc's energy policy, lobbying hard for reductions in renewables subsidies - a particularly sensitive topic at the EU level.

In a twist of events in late November, the Commission sent a draft letter to Berlin warning it would investigate the possibility that energy surcharge discounts offered to German industries such as cement, steel, and chemical plants may be a misuse of incentives and exemptions.

European industry as a whole has watched enviously this past year as the US shale gas boom cut costs for their trans-Atlantic rivals. Earlier this month, Reuters reported on a draft Commission paper which indicated that - despite paying two and four times as much for electricity and gas respectively - European industrial energy users have buffered these costs through energy efficiency. The paper nevertheless warned that EU-US price differentials may be cause for concern in the long-run.

ICTSD reporting; "EU considers scrapping 2030 binding renewables targets," FINANCIAL TIMES, 13 January 2014; "Analysts lower EU carbon price forecasts," REUTERS, 14 January 2014; "Pollution Costs to Rise as EU Backs Market Fix: Carbon & Climate," BLOOMBERG BUSINESSWEEK, 8 January 2014, "Brussels says energy-intensive industry is coping well despite US price gap," EURACTIV, 7 January 2014, "EU probes green charge exemptions for German industry," REUTERS, 18 December 2013.

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