The European Commission has announced a twin-track approach to fixing Europe’s depressed carbon market with a short-term ‘backloading’ of carbon allowances, to be followed by proposals for long-term structural change before the end of the year.

As EurActiv revealed yesterday, the Commission’s proposal suggests reducing the number of credits in the swollen Emissions Trading System (ETS) by delaying the release of 400 million, 900 million or 1.2 billion of them from the start of the next market issue in 2013.

“The EU ETS has a growing surplus of allowances built up over the last few years,” Climate Action Commissioner Connie Hedegaard said in a statement. “It is not wise to deliberately continue to flood a market that is already oversupplied.”

EU states such as Poland argue that with Europe on track to meet its pledge of a 20% cut in carbon dioxide emissions by 2020 (measured against 1990 levels), the carbon market is not broken and does not need fixing.

But EU officials maintain that the market was also intended to make low-carbon investments more attractive, which it cannot do when the price of carbon is half what it was a year ago.

Investments have stalled in nascent but promising technologies such as carbon capture and storage, which are central to the EU’s plans for decarbonisation by 2050.

By 2030, the Commission believes that carbon capture could account for 15% of its required emissions reductions. Thus, for a long-term solution, Brussels argues that structural reform of the ETS is needed.

Short-term option

“A short-term option is what we have proposed today,” Hedegaard’s spokesman Isaac Valero-Ladrón told a Brussels press conference in response to a question from EurActiv.

But after the summer break – and before the end of the year – the Commission would present a carbon market report outlining proposals for structural change.

“These might include a permanent set-aside of auctions or other different options to strengthen the carbon market,” he said. “This is in the making.”

Despite this hint of stronger action to firm up the market, carbon prices lost another 5% of their value in the hours after the EU’s announcement, falling from €7.20 to €6.77 a tonne. In 2008, the price was €20 a tonne.

“I think we are in for a rough summer,” a senior market observer told EurActiv.

Industry divided

The issue of bolstering the EU’s carbon market has split the industrial world. Companies with low-carbon investments have broken ranks with BusinessEurope, which lobbies hard against any ‘interference’ in the market.

A coalition of energy companies including Shell, General Electric, GDF Suez, Dong Energy and Alstom was quick to welcome the EU’s initiative – and call for it to go further. 

The EU’s backloading “should at a minimum reflect the European Parliament environmental committee’s position calling for the withdrawal of 1.4 billion ETS allowances,” they said in a joint statement.

However, Europe's energy-intensive industry lobbies have long staked out a position that increasing costs for Europe’s steel, cement and metal factories will hurt competitiveness and cause ‘carbon leakage’ by pushing them to relocate abroad.

“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,” Gordon Moffat, director-general of the steel-manufacturers association Eurofer, said in a statement.

“This policy is risking Europe’s industrial base and economic prosperity,” he said, adding that no existing technology would allow steel manufacturers to meet the EU’s target for a 20% emissions cut by 2020.

Surplus value

Environmentalists counter that 69% of all surplus carbon allowances were found in Europe’s steel and cement sectors last year.

In 2010, the two sectors accrued surplus allowances worth an estimated €3.4 billion, equivalent to the entire annual financial support that Europe currently provides to renewables, according to Sandbag, an environmental group.

In 2011, two steelmakers alone – Arcelor Mittal and Tata Steel – received 62.4 million more free carbon permits than they used, the most of any European company.

But Peter Botschek, director of the European Chemical Industry Council, insisted that the current carbon price showed a market system functioning well, according to signals of demand and supply.

“We are alarmed that the European Commission wants to get a blank cheque enabling them to interfere with the allowances auctioning,” he said.

“If you want to reform, remove structural problems,” he added. “Don’t try to manipulate the market.”