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Demand for European Union carbon permits and United Nations offsets in the five years through 2012 is 2.2 billion metric tons less than anticipated by EU regulators, according to an environmental group.
In addition to the 2.2 billion-ton shortfall in demand, there is a further 900 million tons of excess allowances in the EU market, according to a report published today by Sandbag, a London non-governmental group that campaigns to improve emissions trading systems.
“A full correction to the cap would require withdrawing 3.1 gigatons of allowances from the scheme,” according to the report. “The business-as-usual emissions baseline against which both the EU climate target and the ETS caps were set are totally obsolete.”
The report said that a “combination of overallocation and recession” has created an excess supply of 392 million EU permits as of 2011, of which 78 percent, or 307 million tons was given to 10 companies, including ArcelorMittal (MT), Lafarge SA (LG), Tata Steel Ltd. (TATA) and HeidelbergCement AG. Sandbag said that these companies have earned at least 1.8 billion euros ($2.3 billion) from the sale of these surplus permits.
The report called for the removal of 3.1 billion permits from auctions beginning in 2013, which it said would lead to a cumulative shortfall of 3.7 billion tons by 2020, when the third phase of the market ends.
EU carbon for December fell 2.2 percent to 7.43 euros ($9.42) a metric ton on the ICE Futures Europe exchange in London as of 8:41 a.m. It’s the first decline in 10 sessions.
The permits rose 9.4 percent last week, the biggest weekly gain since the five days ending Feb. 17. Regulators are considering how to react to the surge in unneeded allowances and credits, which prompted record low prices of 5.99 euros a ton on April 4.
The EU may favor delaying sales of as many as 1.2 billion carbon allowances from 2013 in a planned report on the outlook for its emissions-trading program, two people with knowledge of the matter said last week.
The European Commission, the 27-nation EU’s regulatory arm, sketched out three scenarios to temporarily curb the oversupply in the cap-and-trade system in the draft report, the people said, declining to be identified because talks on the document are confidential. The two other options are withholding 400 million or 900 million permits in the three years through 2015, they said.
“We are on the side of being ambitious,” said Edward Davey, U.K. secretary of state for energy and climate change, declining to specify Britain’s preference.
EU nations need to engage with nations such as Poland, which has argued against intervention in the carbon market, Davey said at a London seminar yesterday to debate Sandbag’s report. “I don’t think we should isolate Poland.”
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