Allowances surplus and low price spur ETS carbon trading changes

Posted on 26 Jul 2012 by Tim Brown

The European Commission has delivered a loose plan to bolster the Emissions Trading Scheme (ETS) and raise the carbon trading price to a level needed to encourage low-carbon investment and discourage pollution.

The EU ETS carbon price has faltered due to a fraud scandal and an over supply of allowances because of the recession. As a result, the Commission has decided on a series of steps including delaying the auction of new allowances and clarifying an article of EU law on auction time-tabling.

The Commission’s draft proposal does not include any exact figures but the analysis presents three options – withholding 400 million, 900 million or 1.2 billion allowances over the first three years of the market’s next phase.

“What we have been saying is that the surplus is up to 1.4 billion, but I understand from the technical experts we have to have certain room. You cannot eat up all the flexibility in the system, so 1.2 billion as far as they can see, that’s probably the maximum,” Climate Commissioner Connie Hedegaard told Reuters.

However, traders did not react favourably to the lack of details in the European Commission’s plan to fix the EU carbon market sending the carbon price below 7 euros.

Dr Matthew Brown, CBI Head of Energy and Climate Change policy says that backloading emissions allowances can only be useful as part of a long-term plan and that the scheme in its current form will not produce the results required to meet emissions targets.

“The EU ETS is currently out of step with Europe’s long-term climate goals, and investors urgently need to see emissions targets for 2030 and beyond,” said Dr Brown. “The Commission’s EU ETS report due in the autumn must provide a blueprint for the future of the scheme, which should include ways to protect energy-intensive industries at risk of international competition.”

After the Commission’s summer break, the outline proposal and analysis will be debated by officials from all member states at a meeting of the Climate Change Committee on September 19.

Also later this year, the Commission will present its first report on the functioning of the carbon market, which could launch a debate on the deeper reform many say is necessary.

Such structural change could include the permanent, rather than temporary withdrawal of allowances, but it would require much longer political debate.

The idea of adjusting the auction timetable is that this can be agreed relatively easily through a fast-track EU process but the European Union member states still need to endorse it.

Ian Rodgers, director of UK Steel, commented: “The proposal today from the Commission will do nothing to assist emissions reduction in the steel sector. The proposals do not help with investor certainty – quite the opposite. This further tinkering of the system demonstrates that the EU ETS as currently conceived is fundamentally flawed.

“As we begin to look at the shape of EU ETS post 2020 we need a frank and honest debate about its future design in the context of the goals of emissions trading and the pace at which industry sectors can decarbonise.”

Calling for sector specific policies on emissions trading, Mr Rodgers added: “The drivers and barriers manufacturing industries face when addressing their greenhouse gas emissions are unique for each sector. To drive long-term decarbonisation without deindustrialisation policies should be designed to reflect this. The current ‘one size fits all’ approach of EU ETS will not deliver on our goals, but just delay them.”

Meanwhile, a committee of MPs has urged the government to stop fossil fuel subsidies and invest in more efficient forms of energy.