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Legality of set aside plan to boost CO2 price challenged

21 Jun 2012 16:53:13 | edcm

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The European Commission's plan to delay the auctioning of carbon allowances early in phase III of the EU's emissions trading system (ETS) to boost prices is illegal, according to a legal opinion compiled on behalf of Europe's energy intensive industries.

Climate Commissioner Connie Hedegaard's promise to delay the auctioning of some phase III (2013-2020) allowances, known as "set-aside", could now face a legal challenge from some of Europe's biggest industry players.

Steel, cement, metals and glass are among the sectors that commissioned the legal opinion from German law firm Luther.

The Directive and the market

The Commission is not entitled to interfere with the carbon market through the changes to the auctioning regulation that it proposes, according to lawyer Stefan Altenschmidt of Luther.

"Under the emissions trading directive, the auctioning regulation is only in place to deal with technical details of auctioning. Any other amendment has to be made within the guidelines of the emissions trading directive, and therefore if one tries to increase the carbon price, one will have to amend the entire trading directive," Altenschmidt said over the phone.

The Commission's auction delay proposal is intended as a quick-fix solution to the problem of low carbon prices in Europe. Longer term "structural" reform of the directive itself is also on the cards, but is likely to take two or three years to get through the EU's labyrinthine legislative process (see EDCM 31 May 2012).

The promise of a possible delay and later curb of allowances has already helped to lift prices over recent sessions, ICIS data suggests, with structural reforms promising to boost prices in phase III.

Carbon prices have been bearish amid a large surplus of allowances in the current phase II and lower-than-expected emissions, and thus demand for credits, amid the eurozone's economic crisis.

While the benchmark EU allowance (EUA) December 2012 contract had shed 15% of its value over the course of May, falling from €7.60 per tonne of CO2 equivalent (tCO2e) to €6.45/tCO2e, the contract has appreciated considerably since the EU announcements and over the course of June to date. After closing at €6.30/tCO2e on 1 June 2012, it has risen to as high as €7.55/tCO2e on 19 June, ICIS data shows, marking an increase of 20%. A successful legal challenge is likely to have a bearish impact on prices again.

Legal fineprint

"It's very important for the Commission to know that any attempt to use the auctioning regulation as a tool for raising the carbon price runs a risk of legal challenge either by industry or by member states," the lawyer said.

"From our reading of the ETS directive, there is only one instance that allows the Commission to interfere in the carbon price and that is if the carbon price is too high," he said.

But no legal challenge can be mounted until the Commission brings forward its finalised proposals on auction delays, which is likely to happen next month. Once the proposal is made public, the industries will decide their next move, according to Axel Eggert, director of public affairs at steel association Eurofer.

"There's no decision yet. We have to wait and see what the paper looks like. But in any case for us it was very important to get some more certainty about the legality because we said from the beginning that [set aside] can't be in line with the directive because if you interfere with the market, then it's not a market system any more," Eggert said.

"And Article I of the directive says objective of reducing emissions by 21% should be achieved at the lowest cost," he said.

The Commission declined to comment on the matter. VF

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