The European Union emissions trading system is oversupplied by allowances equivalent to almost 50 percent of the annual pollution limit in the program, according to Climate Commissioner Connie Hedegaard.
“The difficult macroeconomic circumstances have substantially altered the supply-demand balance in the European carbon market,” she told a conference in Brussels today. “Together with the increasing use of international credits this has been the key driver in the build-up of unused allowances to now more than 950 million.”
The excess drove prices in the world’s biggest cap-and- trade program to a record low in April, triggering calls from companies including Royal Dutch Shell Plc (RDSA) for the EU to withhold a number of permits from the market as of next year. The surplus, equivalent to almost half the 2.04 billion-metric-ton average annual allocation in the 2008-2012 trading phase, can be carried over to the next period from 2013 to 2020.
To help alleviate the oversupply, Hedegaard announced in April that she will put forward a proposal to delay sales of some permits at carbon auctions as of next year, an idea known as backloading. The draft measure, planned for July, should be presented “rather soon,” she said today.
The surplus estimate by the commission’s climate department may offer some guidance about the number of permits the EU will propose to temporarily withhold, according to Sam Van den plas, expert at the WWF European Policy Office in Brussels.
“If the commission were to delay auctions of 950 million euros that’d be a modest proposal,” he said by phone today.
The measure to postpone some auctions will aim to prevent “overflooding the market that is already being overflooded,” Hedegaard said. It will be published alongside a report on the functioning of the EU carbon market, which may give an insight into the Commission’s thinking behind the the regulatory proposal.
While the final amount of permits to be delayed in the draft regulation is yet to be decided and information about it is restricted, the report sketches three potential scenarios for policy makers: withholding 400 million, 900 million and 1.2 billion permits, with the later marked as a preferred option, people familiar with the matter said on June 15.
The backloading proposal is subject to internal talks at the commission and risks delay after the directorates responsible for enterprise, monetary affairs and transport voiced some objections, people with the knowledge of the issue said last week. They declined to be identified because the talks are confidential.
The planned measure sparked protests from BusinessEurope, a Brussels-based employers’ federation, which said last month the EU must avoid short-term fixes to the ETS as these would interfere with a more constructive decision on how to achieve a “systemic solution” to improve the program in the long term.
Hedegaard said today she hoped the report on the functioning of the ETS will trigger a debate among member states, non-governmental organizations, industry associations and climate experts on how to best strengthen the system in the longer term. One option the report will discuss is to permanently set aside a number of permits to tackle oversupply, the people familiar with the matter said.
The price of EU carbon permits for delivery in December dropped to 5.99 euros ($7.36) on April 3, the lowest level since the contract started trading in 2005. The 17-nation euro economy will shrink 0.3 percent this year, according to the European Commission. Unemployment rose to a record 11.1 percent in May, economic confidence slumped to the lowest in more than 2 1/2 years in June, and services and manufacturing output contracted for a fifth month in the Euro area.
“Naturally, my preferred solution would be to see high rates of economic growth that would also drive the investment in low-carbon economy,” Hedegaard said. “But as you know the most recent data point to rather sluggish growth this and next year. There’s no easy, automatic solution here.”
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