The European Commission's proposal to fix the beleaguered Emissions Trading System (ETS) today (25 July) will include scenarios for ‘backloading’ a massive 400 million, 900 million, or 1.2 billion carbon allowances, EurActiv understands.
Little of substance had been expected to be announced in the proposal, aimed at raising the price of carbon, currently languishing at €7 a tonne, down from a high of €20 a tonne in 2008.
But sources say it will include three variable scenarios for the number of backloads, although the final agreed number may be different.
This will then be introduced in phases over the next round of the ETS’s auctioning process, which begins in 2013.
“The Commission has successfully overcome internal hurdles and innovated formal processes to bring us to the verge of a backload around the right number,” said Sanjeev Kumar, a senior associate at the E3G environmental group.
The proposed backloads are expected to form part of a wide public consultation, which will then inform an ETS review. Hard legislative proposals will follow later on.
The energy giant GDF Suez was said to have thrown its support behind the EU’s plans on the eve of the Commission's announcement.
The EU’s cap-and-trade carbon market is massively over-supplied with carbon allowances due to generous free allocations, uncertainty over the future of EU climate funding, and the emissions-lowering effects of recession.
As carbon prices have fallen, so has the ETS mechanism’s ability to incentivise low-carbon investments.
To give it a boost, the EU wants to ‘backload’ – or stagger – the numbers of carbon allowances released so that fewer are released initially and more later, when the economy may have picked up sufficiently to compensate for any price deflation this would cause.
But without details of the number of allowances that will be permanently removed from the system, some analysts fear that market jitters may continue.
Market analysts at Point Carbon estimate that the ETS currently contains 1.8 billion excess allowances.
In this context, experts believe that even the removal of 800 million allowances may not raise the price of carbon much beyond €12 a tonne.
Bearish markets could test price floor
Earlier yesterday, analysts and observers of Europe’s €90 billion ETS expressed concerns about the carbon price plummeting if the EU’s proposals failed to reassure investors.
“If there is no long term plan to explain how this will unfold, I think the market is going to look for an excuse to react in a very bearish way,” one senior market observer told EurActiv. “They could test the price floor.”
The carbon price floor would effectively be zero, analysts say.
“If you move the market 12% in one day - the equivalent of 1500 points on the Dow - you’re going to have a lot of people opening the window and jumping out,” the source said.
However, Stig Schjølset, the head of EU carbon analysis for Thomson Reuters Point Carbon, said that recent market tumbles – in response to rumours that the EU’s announcement would be delayed – had left little more room for the price to fall.
“If anything I think there will be relief that the proposals are finally out and there will not necessarily be a huge market reaction,” he told EurActiv.
“The market will need some time to digest this before it is able to take a clear direction,” he added.
Financial sentiment may be lightened by some other aspects of the proposal that are expected to be outlined today.
One anticipated amendment of the ETS directive would give the European Commission the authority to change the auctioning legislation to do this without fear of legal challenges stringing out the process.
Another revision to the auctioning regulation will clarify that any action taken is intended to achieve an unspecified number of allowances being backloaded, over a certain time frame.
The third part of the package, an annual ETS review containing policy options, which Climate Action Commissioner Connie Hedegaard announced in April, is now expected later this autumn.
"As an association we believe the strength of the EU's proposal will be in what it says about the long term structural reform process,"said Simone Ruiz, the EU policy director of the International Emissions Trading Association.
"We hope to see some substance. The report should outline a few options for a cap adjustment in the mid-term, for 2030 targets, and proposals to discuss extending the cap to other factors."
- July 25 2012: Results of ETS Review due to be announced
- 2013: Third phase of EU ETS trading scheduled to begin, and continue until 2020