The European Commission will try to shore up its battered carbon market today (14 November) with a structural report signalling a future squeeze on carbon credits to augment a planned  ‘backloading’ or postponing of 900 million allowance auctions until 2019 and 2020.

The Climate Commissioner, Connie Hedegaard, said that although the EU’s Emissions Trading System (ETS) was delivering emissions reductions, a glut of allowances was holding back investments in energy efficiency and green technologies.

“We must not flood a market that is already oversupplied,” she said. “Market operators must have clarity before year-end on this.”

“At the same time, the Commission presents options for possible structural measures that can provide a sustainable solution to the surplus in the longer term,” she added.

The Commission's report estimates an oversupply of up to 2 billion allowances that is unlikely to decline before 2020, and proposes several potential remedies:

  • Increasing the EU emission reduction target to 30% in 2020;
  • Permanently cancelling a number of allowances in Phase III (as of 2013);
  • Increasing the 1.74% annual decline in the cap on allowances that can be allocated to member states up to and beyond 2020;
  • Extending the scope of the Emissions Trading System, or ETS, to other sectors;
  • Limiting the use of international credits in the ETS;
  • Introducing discretionary price management mechanisms, such as a carbon price floor or reserve price.

Any of these options would require a new legislative proposal, accompanied by an impact assessment, a lengthy process.

But the report indicates that the ETS will be “critical” in driving low carbon investments and that it will need to play “an increased role” in the transition to a low carbon economy by 2050.

Marcus Ferdinand, a senior market analyst at Reuters Thomson Point Carbon, said the Commission’s options appeared to have been listed according to the European Commission's preferences.

“The cleanest options for sure would be to go for a 30% target, or to change the 1.74% factor of the cap,” he told EurActiv, citing these options’ power to transform the overall market structure towards helping long-term emissions reductions.

Commission officials believe that the 1.74% factor as it stands would impel the ETS to reduce Europe’s non-aviation related emissions to more than 70% of the 2005 level by 2050, an arrow in the quiver for future arguments over 2030 targets.

Quick fix

But A “quick-fix” permanent cancellation was the only realisable short-term option that Ferdinand could see.

His analysis was backed by Rhian Kelly, the environmental director of the Confederation of British Industry (CBI). 

“We would be delighted if an option was put forward to deliver a 2030 package – including greenhouse gas targets – and a consequential reform to the ETS directive for Phase 4 of the directive,” Kelly told EurActiv.

This option will now go out to stakeholders, along with the rest of the carbon market proposals to be “discussed and explored without delay,” the paper says.

The proposal would also replace the current 27 national ETS registries with a single Union-wide registry and implements harmonised rules for free allocations.  

900 million reasons to be cheerful?

The structural report follows a ‘backload’ or delay in the auctioning of 900 million carbon allowances in Phase III of the ETS, which begins next year, and was announced late on 12 November to avoid press leaks.

The information is considered market sensitive and indeed, carbon prices rose slightly to over €9 in anticipation of the move. This is an improvement on recent price lows of around €6 a tonne, although still well below the €30 a tonne expected just four years ago.

“Many market participants traded on the rumour and sold on the news,” Ferdinand said. But even a cancellation of the backloaded allowances would only raise carbon allowances to around €15 a tonne by 2020, he said.

Rather than cancel them, the EU plans to auction the backloaded allowances in the last two years of the 2013-2020 trading period, to create an interim scarcity that boosts prices.

However, the temporary nature of the allowances’ removal from the market could be quickly factored into future prices by market traders. 

The CBI does not support the EU’s backloading proposals, but Kelly said she was agnostic about their future use.

“If there seems to be a kink in the [market] curve around 2020, then it may be that short-term intervention is needed and you might want to have backloading and cancellations,” she said.

The 900 million figure was the middle option of the EU’s three suggested figures – 400 million, 900 million and 1.2 billion allowances.

Obstacles to reform

Any effort to strengthen the EU’s low-carbon goals is likely to prove an anathema to some EU states, such as Poland.

Warsaw’s positioning is supported by the centre-right European Peoples Party (EPP) group in the European Parliament, whose MEPs have delayed passage of legislation needed to allow the Commission to implement market reforms, to the dismay of their Greens and Socialist colleagues.

On 5 November, EPP Chairman Joseph Daul sent a letter to Commission President José Manuel Barroso and Climate Commissioner Connie Hedegaard urging the Commission to postpone submission of any backloading regulation until after spring 2013.

The backloading issue also divides European businesses protecting low-carbon investments, from energy-intensive industries which say that they fear carbon leakage.   

“We don’t believe in any interference with a well-functioning market mechanism,” said Susanne Kuschel, a spokeswoman for the German company BASF.

“It doesn’t matter how many allowances you take out, whether you backload them or set them aside permanently, markets go up and they go down and if you artificially intervene in them, you destroy their confidence,” she said.

This position is strongly supported by BusinessEurope, the employers’ confederation, which claims to speak on behalf of all of Europe’s employers.

But a letter sent to MEPs by 16 major companies – including Shell, Unilever, EDF, GDF Suez, Statoil and GE – calls for “urgent intervention” in the carbon markets, as well as longer term structural measures.

“We hope that the Climate Change Committee endorses the back-loading proposal before January 2013 so that the EU ETS as a whole remains the cornerstone of EU climate and energy policy,” their letter says.

Rhian Kelly told EurActiv that she was surprised by how much commonality there was between the CBI’s positioning and that of BusinessEurope. “I don’t think we’re as diametrically opposed as people would suggest,” she said.

However, asked if the CBI was satisfied that its climate position was being adequately represented by BusinessEurope in Brussels, Kelly paused for several seconds. “No comment,” she finally said.