Bloomberg News

EU Carbon-Permit Set-Aside Option Backed by Parliament Panel

February 28, 2012

The European Parliament’s industry committee endorsed the option of withholding some carbon-dioxide permits to bolster prices in the world’s biggest emissions- trading system.

The committee voted today in Brussels to amend a planned European Union energy-efficiency law by saying that EU regulators should put forward, “if appropriate,” measures that “may include withholding of the necessary amount of allowances” from auctions as early as next year. Prices in Europe’s cap-and-trade system dropped to a record last month because of oversupply.

The draft legislation needs the support of the full 754- seat Parliament and of EU national governments. Under the set- aside option, withholding permits would require a separate initiative by the European Commission, the 27-nation bloc’s regulatory arm, by the end of this year.

“A return to a viable carbon price is not only possible but within reach,” Scott McGregor, chief executive officer of Camco International Ltd., a developer of emissions-offset credits, said in an e-mail after the Parliament committee vote.

At stake is the price of CO2 in the region’s emissions market, which imposes pollution quotas on more than 11,000 companies including Electricite de France SA, Europe’s biggest power generator, and Royal Dutch Shell Plc (RDSA), the region’s largest oil company.

Price ‘Bounce’

EU carbon allowances for delivery in December rose as much as 1.3 percent to a two-month high of 9.63 euros ($12.94) a metric ton on the ICE Futures Europe exchange in London after the vote, before falling as much as 6.5 percent to 8.88 euros at 1:55 p.m. The contract jumped as much as 9 percent on Feb. 16, when representatives of all parties on the EU Parliament’s industry committee agreed to push for a set-aside amendment.

“We had already seen a bounce on the news the committee had reached an agreement, so we expect the market moves today to be limited,” Trevor Sikorski, an analyst in London for Barclays Plc, said in an e-mail. “While this is a further step on the legislative road, there are still a number of barriers still to cross. It remains a long haul before there is certainty that the set-aside will proceed.”

Today’s verdict in the EU Parliament kicks off talks between it and national governments over a final agreement. Claude Turmes of Luxembourg is the assembly’s lead negotiator, while the Danish government, which holds the EU’s rotating presidency, represents member states. Both sides are seeking a fast-track agreement on the legislation by the end of June.

Blocking Minority

Turmes predicted the set-aside option would become part of the EU energy-efficiency law over the resistance of Poland, which has fought stricter climate-protection rules for years because of its dependence on relatively dirty coal.

“The question is whether Poland will be able to build a blocking minority,” Turmes, who belongs to the Green party, told reporters. “Poland will be isolated.”

The EU emissions-trading system, or ETS, was valued at $120 billion last year. Analysts at Bloomberg New Energy Finance predict that, in the current trading period from 2008 through 2012, the ETS will be oversupplied by permits covering around 1.1 billion tons of CO2, worth 10 billion euros at today’s prices. This surplus may be transferred into the next trading stage from 2013 to 2020.

European carbon allowances have lost 44 percent from a year ago on concern that the EU energy-savings measures foreseen in the draft law will erode demand, expanding oversupply. The commission proposed the energy-efficiency legislation last year.

‘Strong Support’

The commission originally floated the idea of withholding CO2 permits in a 2010 policy paper on climate change. It has suggested this could be done gradually from the pool of allowances due to be sold to companies by national governments starting in 2013.

Such a step would require amending a separate CO2-permit auctioning law through a committee that the commission chairs and that includes national experts. For such a measure to pass, the representatives of member states must give their approval and the EU Parliament must refrain from exercising a veto during a three-month scrutiny period.

“The commission now has strong support for a separate set- aside proposal,” Konrad Hanschmidt, a carbon-markets analyst at Bloomberg New Energy Finance in London, said in an e-mail. “The discussions are now likely to move back to the corridors of Brussels concentrating on how the set-aside can be implemented in practice.”

Most-Discussed Buzzword

The commission will consider “many factors” before making any set-aside proposal and must take account of emission trends after the EU emerges from the current economic slump, according to Jos Delbeke, the organization’s director general for climate.

“Setting aside, the buzzword that is currently most discussed, has many different connotations and before we go to any interference with the market we’d like to see in black and white what are the different elements that constitute market prices,” Delbeke told a conference yesterday.

Environmental lobby group Sandbag urged EU governments to follow the Parliament industry committee in endorsing the set- aside option.

“Politicians control this market and they can and must fix it,” Damien Morris, a London-based senior policy adviser for Sandbag, said in an e-mail today.

The withholding of CO2 permits would be temporary under the amendment endorsed by the committee, meaning the allowances would eventually be auctioned by the end of 2020. The option amounts to the right to curb auctioning volumes early in the period.

Any eventual cancellation of permits at the end of, or during, the 2013-2020 trading phase would effectively mean tightening the EU’s emissions cap. This would require a revision of the ETS law, a politically contentious step that would also involve the EU Parliament and could take more than a year.

To contact the reporters on this story: Ewa Krukowska in Brussels at ekrukowska@bloomberg.net. Jonathan Stearns in Brussels at jstearns2@bloomberg.net

To contact the editors responsible for this story: Stephen Voss at sev@bloomberg.net. James Hertling at jhertling@bloomberg.net


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