Energy efficiency projects encouraged by high carbon prices caused almost half of Europe’s glut of permits and a plan to temporarily withhold allowances will exacerbate the oversupply by 2020, said Climate Mundial Ltd.
The oversupply, which will reach about 1.8 billion metric tons by April, was formed when factories and power stations reacted to the start of the world’s biggest carbon market in 2005, Daniel Rossetto, managing director of Climate Mundial in London, which advises in emission markets, said in a report dated Jan. 23. They retrofitted boilers, installed heat-recovery systems, improved lighting and insulation to cut energy use and the need for emission allowances, he said.
EU carbon permits plunged to a record on Jan. 24, as nations consider the European Commission’s plan, which is known as backloading because allowances taken from supply in the next three years would be returned near the end of the decade. Instead, the commission should install by 2015 a system that would adjust its cap five years in advance starting in the next phase from 2021, Climate Mundial recommended.
“Response is part of a continuum: short market, triggering high carbon prices, followed by response and ending with low carbon prices,” Rossetto said. “The European Commission is therefore urged not to implement backloading, as such a measure would turn the continuum into a cycle.”
Carbon permits for December rose 2 cents to 3.44 euros ($4.69) a metric ton, according to data from the ICE Futures Europe exchange in London at 8:15 a.m. They rose as high as 29.69 euros in 2008 and a record 31 euros two years earlier.
“The new annual cap should be set be set based on the advice of a newly formed independent panel, which would make its recommendations based on a review of the actual, observed cost of abatement and referenced to the emission trajectories needed to meet long term greenhouse-gas targets,” said Rossetto, who previously managed offset credits for JPMorgan Chase & Co.
The rolling adjusted cap could also help account for changes in the global response to climate change and technology developments, he said.
Under Australia’s carbon-pricing mechanism, regulators will set caps every year five years ahead, taking account of international greenhouse-gas agreements, economic and social implications of limits and even the extent to which factories and power stations are complying with the system’s rules, according to the program’s law.
The EU is preparing to start a discussion on long-term scenarios for its emissions program after the commission outlined six potential options to strengthen it in a November policy paper. Any deeper changes to the design of the market would require a change of existing EU legislation or a new law approved by national governments and the European Parliament.
As regulators seek to make permanent changes to reinvigorate the EU market, they need to restate their commitment to only making adjustments for Phase 4 beginning in 2021, rather than the current phase that started this year, Rossetto said.
“We cannot correct the Phase 2 allocations by making adjustments to Phase 3,” he said. “It will destroy certainty in the EU emissions trading system.” The second phase ran from 2008 until last year.
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