Brussels rolls out carbon market fix

Dirk Forrister, who heads the International Emissions Trading Association, took a balanced view of the EU’s announcement. “The EU needs to restore confidence in the ETS which is still functioning despite challenging economic circumstances,” he said. “We believe that a persistently oversupplied market becomes a source of concern over time.”

“Market participants have been anxious while awaiting the release of these documents, and we welcome the start of an exchange of views on what should be the future of this key pillar of the EU’s Energy and Climate policy,” he went on. “We now call on the Commission, Parliament and Member States to act promptly on today’s proposals, to clarify the timelines for adoption and to simultaneously start a discussion on structural reforms of the EU ETS.”

But the European Association of Metals, Eurometaux, was less positive in their assessment. “The EC proposal cannot be used as a proper basis for decision-making as it lacks a realistic assessment of the impact on industry at installation level, with real electricity prices, real industry pass-through abilities, and real international level playing field impacts,” a statement issued by the group said.

The press release continued: “Europe’s ETS policy should not only be directed at a part of industry for which high carbon costs are beneficial. Such a policy is clearly to the detriment of the larger part of the energy intensive manufacturing industry, for which higher carbon costs and market uncertainty lead to even less investment in low carbon technology in Europe, ultimately worsening the EU crisis.”

Green party MEP Bas Eickhout, however, criticised the European Commission for timidity in the face of a climate crisis. “Despite the urgent need to repair the misfiring emissions trading scheme, the Commission is tiptoeing towards action,” he said. “The emissions trading scheme is in need of serious surgery to address the current problems with the carbon market and ensure it can fulfil its purpose of delivering emissions reductions in the EU.”

“The European Parliament and Council have called for measures to address the oversupply of emissions allowances and the unrealistically low carbon price on the initiative of the Greens, and the Commission promised to deliver this year,” he said. “Regrettably, the Commission is riven by internal wrangling and has only set out limited proposals on the legal base today, merely preparing the ground for future steps and making it more difficult to shore up the ETS before the end of the year.”

“We are alarmed that the European Commission wants to get a blank cheque enabling them to interfere with the allowances auctioning,” said Peter Botschek for the European Chemical Industry Council (Cefic). “Backloading will be ineffective in the long term because withheld allowances must be ‘reloaded’ towards the end of the trading period. We don’t see how the Commission can anticipate ‘oversupply’ of emission allowances when considering yet unknown demand for allowances from economic growth in the upcoming third period of the emissions trading taking place from 2013-2020. It’s a tall order calculate for that period.” 

Botschek added: “The current carbon price reflects demand and shows that that the ETS carbon market is actually functioning. The price is reflective of a number of factors, including EU and national energy efficiency policies and renewable energy subsidies that affect in demand for emission allowances. If you want to reform, remove structural problems.  Don’t try to manipulate the market as it stands.”

That position was challenged by the energy alliance of Alstom, Danish Energy Association, Dong Energy, Doosan Power Systems, EnBw, GDF Suez, General Electric, European Renewable Energy Research Centres Agency, Shell, Statoil and 3M.  “We welcome the Commission’s proposals, made today, to strengthen the EU ETS,” the group, which has been calling for a setaside since last year, said in a joint statement.

“We now urge support from the European institutions to agree a ‘back-loading’ of allowances which are to be auctioned ahead of the third trading period of the EU ETS. This re-profiling of the auctioning calendar should, at a minimum, reflect the European Parliament Environment Committee’s position calling for the withdrawal of 1.4 billion ETS Allowances. Furthermore, we look forward to the Commission proposals on structural, predictable and market based measures to strengthen the ETS and will contribute, in a positive way, to this process,” they concluded.

“The ETS is in crisis and must be fixed urgently,” said Julia Michalak, EU Climate Policy officer for Climate Action Network Europe, an NGO. “The EU should use the extra time to determine the right number of carbon permits that should be withdrawn from the market and permanently cancelled in the future. If Member States don’t get the guidance and certainty they need from Brussels, they may start implementing market measures of their own, undermining the coherence of the EU’s carbon market."

Another environmental group, Greenpeace, sounded a similar note. EU climate policy director Joris den Blanken said: “The euro crisis is showing Europe the cost of doing too little too late,” he said. “The EU should not repeat the same mistakes with the carbon market. We need swift and decisive action or the scheme will deteriorate fast and will not deliver any real reduction in carbon emissions for at least a decade. The number of allowances needs to come right down or companies might as well be trading Monopoly money.”

Market analysts Thomson Reuters Point Carbon were focused on the effect of the announcement on the carbon price. “If there ends up being an agreement on back-loading and cancelling in the order of 800 million allowances, which we think is in the upper range of what is politically feasible, we assume that carbon prices could increase by as much as €6/t on average over the 2013-20 period compared to current price levels” said Marcus Ferdinand, a senior market analyst with the group.

“The actual price impact is difficult to predict as there are still several political options on the table on how to realise the proposed market intervention”, he added. “The crucial decision is not only on the number of allowances that will be temporarily removed from the market, but more importantly on the timing and the volume of the EUAs that will be permanently cancelled in order to reduce the current oversupply. “In order to permanently cancel the back-loaded volume, a separate political decision is needed that will take some time and is not expected to be concluded before the end of 2014.”

For the World Wildlife Fund, the EU climate policy officer Sam Van den Plas issued a statement, saying: “The lack of ideas coming out of the Commission for real emission reductions is a big disappointment. Further reforms are needed to make the European carbon market work for the climate in a positive way. We all know that the EU Emission Trading Scheme is in a state of crisis and only structural measures can save it from collapse.”

According to the European Wind Energy Association (EWEA), the EU’s move was needed to prevent carbon prices from falling any further. "The European Commission has finally taken the first step towards boosting the carbon price in the short term. As a second step a permanent solution to the current and future oversupply of carbon allowances needs to be found to ensure a high and stable future price: the amount of allowances put on the market up until 2020 needs to be reduced by 2.6 billion", said Rémi Gruet, EWEA’s senior regulatory affairs advisor.

"Today's EU industry is changing and encompasses many new sectors that benefit from ambitious carbon pricing,” he went on. “The wind industry is one of the most dynamic and globally competitive, in 2010 contributing 32.4 billion Euros to the EU's GDP, 8.8bn Euros in exports, and supporting 238,000 EU jobs. Increasing the carbon price will help both the climate and economic recovery."

“It is unfortunate that the backloading of Phase 3 auctions has faced further delays, but we hope that the proposed clarification of the language in the ETS Directive can be executed swiftly so this can properly get underway,” commented Damien Morris, senior policy advisor at Sandbag.

“With a clearer legal mandate, we hope the Commission will move to withhold a quantity of allowances commensurate with the crisis facing the scheme: our research finds that 2.2 billion allowances need to be removed to restore the scarcity envisaged before the recession,"  he said.

But “industry requires certainty,” Gordon Moffat, Eurofer’s director general, said. “A cancellation of allowances is a de facto increase of the CO2 target for 2020 beyond the 21% as set by the directive. We call upon member states, the European Parliament and the Commission to stick to their promises and stop additional unilateral policy while other countries haven’t committed to anything.”

“This policy is risking Europe’s industrial base and economic prosperity. There is no technology available for steelmaking that would allow the industry to reach even the existing target. We need rather a sectoral approach based on economically viable technologies. The ‘one-size fits all’ policy must end”, he demanded.