Carbon market overhaul closer after EU lawmakers approve plan

European Union negotiators are endorsing an accelerated overhaul of the bloc’s carbon market after the price of emission rights fell to levels that fail to deter polluters. Representatives of EU governments, the European Parliament and the European Commission decided on Tuesday to back the 2019 start of a reserve to soak up a permit glut, two years earlier than proposed, according to Latvia, which holds the EU rotating presidency.

Carbon futures for December rose 0.3 percent, adding to this month’s 2 percent rally. “That is an ambitious and balanced agreement,” Ivo Belet, lead lawmaker on the market reform in the European Parliament, said in an interview. “It has broad support across political groups.” The planned reserve would automatically absorb allowances in the EU’s cap-and-trade program if the surplus exceeds a fixed limit, and release them to the market in the event of a shortage. That would curb a permit glut that led to a 65 percent slump in the cost of emissions since 2008 and eroded the penalty for burning coal, the most-polluting fossil fuel.

There are currently more than 2 billion surplus permits, according to EU estimates. Each allowance, which is handed out free or auctioned, gives utilities, factories and airlines the right to emit one metric ton of carbon dioxide.

Permit Circulation

Under the deal, an amount equal to 12 percent of permits in circulation would be withheld from government auctions and placed in the reserve. The allowances stay there for 12 months from each September until the accumulated surplus falls below 833 million, according to two people with knowledge of the matter. In the first year, 8 percent will go in the reserve between January and September, said the people, who asked not to be identified, because the meeting was private.

If the excess drops below 400 million, the EU will return 100 million allowances to the market. EU Climate and Energy Commissioner Miguel Arias Canete said the deal was very good and fair. The commission will now focus its efforts on preparing a post-2020 overhaul of the ETS and plans to present it before the summer break in August, he said on Twitter.

The starting date and scope of the reserve kept member states divided for more than a year. Germany and the U.K. were pushing for an introduction as early as 2017, while Poland headed a group of countries opposing the start of the reform before 2021. Last week, the Czech Republic and Lithuania left the Polish-led coalition, paving the way for an early start.

The “compromise agreement is another step to restoring the credibility of the EU ETS and ensuring that an efficient and effective carbon market system remains at the heart of Europe’s climate change response,” said Sarah Deblock, Brussels-based director for European policy at the International Emissions Trading Association.

Reserve Allowances

Negotiators agreed to strengthen the reform by placing in the reserve 900 million allowances that were withheld from government auctions in 2014-2016 and permits not used by emitters before 2020, the Latvian presidency said.

“The deal is good for the climate; it’s good for the economy,” said Matthias Groote, a lawmaker who oversees the draft law for the Socialist group in the EU Parliament. The compromise envisages a shorter exemption of the extra allowances awarded to some states under the so-called solidarity provision from being included in the reserve. The exemption will last until 2025 instead of 2030 proposed by EU governments, according to Bas Eickhout, member of the Greens group in the European Parliament.

Carbon futures for delivery in December rose as high as 7.75 euros ($8.71) per ton Wednesday, the highest since Feb. 25, on the ICE Futures Europe exchange in London. The contract was trading at 7.61 euros as of 1:42 p.m.

Clean Energy

Lawmakers also agreed to call on the European Commission to consider whether to set up a fund to promote clean energy and innovative projects, according to the people familiar with the matter. Such a fund could be based on 50 million allowances created under a planned reforms of the EU market for the next decade.

The draft law will need to be confirmed by EU nations and by the European Parliament before coming into force. The Latvian presidency will debrief ambassadors from member states on the outcome of the talks Wednesday, with a decision on whether to approve it planned at a later date. In the EU Parliament, the environment committee will vote on the deal on May 26, according to Belet. The whole assembly will most likely cast its ballot during the plenary session starting July 6, he said.

Copyright 2015 Bloomberg

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