Few bulls in cynical carbon market even after set-aside vote passes
The long-awaited vote at the European Parliament industry committee on removing or "setting aside" carbon allowances from the EU Emissions Trading System (ETS) saw policy makers vote through a proposal that is weaker than many carbon market participants would have wished, while the most difficult hurdles in the legislative process are still to come.
The committee voted that the Commission should monitor the effect of the Energy Efficiency Directive (EED) on the ETS and bring forward proposals that may include removing or setting aside carbon allowances from the EU ETS to offset the negative effects of the EED on the carbon market.
Oversupply set to continue
The proposal is not aimed at tackling the existing oversupply in the carbon market. Instead it deals specifically with the effects of the EED, which industry committee leader Claude Turmes, MEP, warned will have a "spill-over effect" on the ETS.
An earlier proposal to remove 1.4bn EU emissions allowances (EUAs) from the system before next year did not make it through the negotiations that preceded Tuesday's vote.
"I estimate the effect of the EED [on the EU ETS] is 500m [carbon] units, and at my forecast the market is oversupplied by 845m units up until 2020, so it doesn't really deal with oversupply," Matthew Gray, an analyst at broker Jefferies Bache said.
On the carbon market, the reaction to the positive vote, which had been widely expected, was bullish for only a short period on Tuesday.
Gains were made late last week in the run-up to the vote, but on Tuesday the benchmark EU contract lost €0.45/tonne of CO2 equivalent session on session in what some traders interpreted as a classic case of "buy the rumour, sell the fact".
"The decision is all mights and ifs and nothing concrete; there are no concrete numbers, so you cannot quantify it into a price," one trader said.
In contrast to the last committee vote in December on the set-aside, which took the market by surprise and saw prices spike, there was "no such euphoria on the market" on Tuesday, the trader added.
"There is still the European Parliament plenary vote. People are realistic - it's not a big fuss," he said.
The industry committee vote was an important step but the tough part of the legislative process on the set-aside has yet to start.
For the set-aside to remain on the table during discussions between the parliament and the European Council next month, there must be a qualified majority in favour of it among member states, a spokesman for the Council presidency said on Tuesday.
This could prove difficult to achieve. A qualified majority on the Council in practice means around two thirds of council votes. Poland - one of the biggst vote-holders because voting is weighted by country size - has signalled that it will oppose the set-aside, which it has previously blocked. Other countries are also understood to be opposed to the idea of the set-aside (see EDCM 13 February 2012 and 22 June 2011).
Denmark, which holds the European Council presidency, has made passing the EED a priority of its six-month term. Discussions are ongoing between Denmark and other member states on forming a position on the EED, but the set-aside "hasn't been looked into much until now", the spokesman said.
After the trialogues, Denmark will bring back the text agreed to with the parliament for a final Council vote, while the parliament will also have to take a full vote on the EED.
Next month's informal discussions or "trialogues" between a negotiating group from the parliament - led by Claude Turmes, and the Council, represented by Denmark - could last for several months.
"We have to take out massively [carbon] certificates in order that the market continues to function in an optimal way," Turmes said.
The amendment, which was passed unanimously, makes it clear that the Commission should monitor the impact of the EED on the ETS and act before the end of the year, Turmes added.
But the Commission has said that it will not bring forward such a proposal until it gets a mandate from the parliament as a whole and from the Council, which comprises member states' ministers (see EDCM 17 February 2012). VF
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