Carbon prices slump on EU ETS fix hiccup


Indications that keenly-awaited details of the European Commission's plans to fix Europe’s depressed carbon market may be delayed until September sent carbon prices spiralling on 18 July.

Declines of up to 7% in already deflated carbon prices were reported, after several EU sources said that the unveiling of plans to fix a supply glut in the Union’s Emissions Trading System (ETS) had been delayed until after the Commission's August recess.

A Commission spokeswoman contacted by EURACTIV said that the issue was still expected to be discussed at a meeting of the EU's 27 commissioners next week but could not comment further.

Any announcement after the meeting may omit key facts and figures about the scheme, partly to prevent disruptive trading. EURACTIV understands that the proposal is considered so ‘market sensitive’ in Brussels that many officials are also being kept in the dark about its details.

The Reuters news agency reported that an internal Commission document signalled a debate on 25 July about the ETS’s legal framework. This may focus on "clarifying" one article relating to the auction time-table. 

Nine of the EU’s 27 commissioners are reported to have raised objections to backloading, necessitating steps to guarantee its legality.

Agreement in time for the next phase of the ETS in 2013 is possible, but will depend on goodwill from EU states. Coal-intensive Poland, which cannot block a decision on its own, objects to moves to bolster the carbon price, as do some industrial sectors.

Carbon price forecast cut

Market participants scrambled on 18 July to unwind long positions and Deutsche Bank cut its EU carbon price forecast for the third quarter to €6-8, from €6-10.

Climate Commissioner Connie Hedegaard had said she would bring forward a review of the ETS, originally planned for next year, and make an announcement before the Commission's August summer break.

The Commission intends to prop up weak carbon prices in the ETS by delaying sales of new allowances in the next phase of the scheme, starting in 2013, a process known as "backloading".

“The macro-economic outlook does not look bright,” said Matteo Mazzoni, analyst at Italy's Nomisma Energia. "I'm not surprised to see this downward correction which will likely be even worse once more permits are auctioned later this year.”

"Nobody really needs [permits] and to sell them now you need to have a pretty attractive spread. I'm still quite sceptical the market has a future at all,” he added.

Many argue deep structural reform is necessary to provide lasting support for the ETS, but that it would be too divisive and too slow. A full EU process can take around two years, although it is possible to move more quickly when there is consent.

Price collapse

Carbon prices have collapsed to record lows due to over-allocation of permits, recession, and long-term uncertainty about climate policy. The markets have been very sensitive to news about withdrawing permits for months.

EU carbon permits traded 6.9% lower at €7.15 on Wednesday, after sinking to €6.80 at one point, above a record low of €5.99 in early April but well below the €20 level it traded at in 2008.

But some environmental groups said the EU’s delayed announcement could allow a proper debate about the numbers.

Estimates vary on the amount of permits which should be removed, ranging from 400 million to as much as 2.6 billion. Brussels has yet to spell out an exact number.

“I don't think it is a catastrophe if … we have a bit more time on the backloading proposal to look at the numbers," said Sam Van Den Plas, climate policy officer at WWF.

David Holyoake, the law and policy advisor for ClientEarth, said that the proposal’s remit at present meant that it would only be a temporary fix.

“The amendment will state what date the backloaded allowances will be released for auction and what the distribution is each year. My hope is it will answer those questions and it will be accompanied by signals or proposals for permanent solutions,” he said.

The ETS is the EU's flagship scheme to tackle climate change, forcing some 12,000 emitters to buy carbon permits called EU allowances to cover their emissions output.

With a turnover of some €90 billion in 2010, the EU's Emissions Trading System (ETS) is the world's largest carbon market. Around 80% of it is traded in futures markets and 20% in spot markets.

The ETS aims to encourage companies to invest in low-polluting technologies by allocating or selling them allowances to cover their annual emissions. The most efficient companies can then sell unused allowances or bank them.

After a series of VAT "carousel" and "phishing" frauds in 2009, the European Commission proposed tighter security measures. But a number of member states declined to implement them because they said they could not afford to.

One Commission official pointed out that tens of thousands of euros spent on security could prevent millions of euros in losses.

  • July 2012: Results of ETS Review due to be announced
  • 2013: Third phase of EU ETS trading scheduled to begin, and continue until 2020

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