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Commission defers to member states on auction delay plans

25 Jul 2012 18:58:14 | edcm

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The European Commission has thrown the ball into EU member states' court on making a decision about how many allowances should be temporarily removed from the EU emissions trading system (ETS) from next year to shore up prices paid by utilities, industry and airlines for their climate change-causing pollution.

The move is perceived by analysts, EU politicians and carbon market participants interviewed by ICIS as a time-buying tactic, necessitated by internal disagreement over whether and how to tackle the oversupply that has depressed carbon prices since last year.

Some of the options the Commission put forward on Wednesday could help the price of EU carbon allowances (EUAs) almost double year on year in 2013, analysts say.

But the tentative proposals published by the Commission have failed to allay uncertainty as to when the promised amendment to the ETS auctioning regulation will be finalised and enacted.

This uncertainty caused volatile swings on the carbon market on Wednesday, which eventually closed €0.35/tonne of CO2 equivalent (tCO2e) lower day on day at €6.85/tCO2e as traders who had bought the rumour sold the fact, market participants said (see carbon snapshot).

Numbers: X marks the spot

"If the political will is there, all the necessary decisions can be taken before the next auctioning phase starts at the beginning of 2013. Now it is up to the European Parliament and the member states to deliver," climate Commissioner Connie Hedegaard said ina statement.

She has laid three "scenarios" on the table for consideration by politicians: delaying sales of 400m, 900m or 1.2bn allowances into the EU carbon market early in ETS phase III, which begins next year.

But in the draft regulation the Commission has given member states to examine, there are only 'X's where the numbers of allowances should be, showing the Commission has no concrete proposal yet.

It's likely that auction volumes will be reduced in 2013, 2014 and 2015, with the allowances in question returned to the system in 2018.

"All three options would reduce auctioned amounts more in 2013 than in 2014 or 2015 compared to the existing profile and increase auctioning by equal amounts in the period 2016 to 2020. This takes account of the fact that the supply-demand imbalance is expected to peak in 2013," the Commission said.

Member states' role

"It's very clear the Commission is trying to buy time and there is internal fighting within the Commission," said GreenLeft MEP Bas Eickhout, who brought forward a separate proposal on set aside of carbon allowances last year.

If and when the Commission reaches an internal compromise after listening to member states' views, this is likely to dictate the shape of the final proposal, he added.

"I think it really boils down to what the Commission proposes because, in the end, the member states always refer to what the Commission suggests. I have a feeling the member states will play the ball back again because there will be 27 opinions and while we know what number [of allowances] Poland will come up with, because that is zero, there will be a large range [of opinions]," he said.

At a Brussels press briefing shortly after the documents were published, a spokesman for the Commissioner also emphasised that it was now politicians' responsibility to take the next steps.

"Parliament and the member states know that time is of the essence here. It is up to them to decide what scenario they want to go for," the spokesman said.

He also said that Commissioner Hedegaard's proposals for longer-term, structural reform were "in the making and will be finalised after the summer break".

Prices

There is "still a long way to go [to] have specific numbers and a political consensus behind the proposals", analyst Matteo Mazzoni of Nomisma Energia said.

"Anything above 700m would have supported the price of EUAs but the Commission came up with a range and now it's a question of faith: whether you believe or look at everything that is going on right now and decide environmental politics is not top of the agenda of our policy makers. I'm not surprised the price has now fallen," Mazzoni said.

There is potential upside for carbon in the fact that any decision among member states on the Commission's proposals will be made by qualified majority voting, Sam van den Plas, EU climate policy officer at environmental organisation WWF said.

"The voting thresholds remain the same, so no single member state could block this from going forward," van den Plas said.

Analyst Matthew Gray of broker Jefferies Bache said he believed the 400m scenario would see prices at €7.00/tCO2e next year, while the 900m scenario would put prices at €10.00/tCO2e and the 1.2bn scenario would boost prices to €13.00/tCO2e.

Another analyst, Isabelle Curien at Deutsche Bank, said hedging requirements could see a delay to the auctioning of 600m tonnes of carbon boost prices to above €15.00/tCO2e early in phase III, because of the additional boost from participants' hedging requirements.

Timing

The market's bearish reaction to Wednesday's announcement was chiefly because of uncertainty on which steps policy-makers will take next and when, analysts said.

"We did not get a clear indication about how this is going to progress. No-one seems to know what the steps are and what the process is," Gray said.

The absence of a final number in the documents published on Wednesday means the exact timing of a finalised proposal remains up in the air, but all the indications are that this should happen within six months, Curien said. VF

Auction delay plans: reactions

• "Market participants have been anxious while awaiting the release of these documents, and we welcome the start of an exchange of views on what should be the future of this key pillar of the EU's energy and climate policy. We now call on the Commission, parliament and member states to act promptly on today's proposals, to clarify the time lines for adoption and to simultaneously start a discussion on structural reforms of the EU ETS."

Dirk Forrister, president and CEO of the International Emissions Trading Authority (IETA)

• "We hope the Commission will move to withhold a quantity of allowances commensurate with the crisis facing the scheme: our research finds that 2.2bn allowances need to be removed to restore the scarcity envisaged before the recession."

Damien Morris, senior policy advisor at ETS watchdog Sandbag

• "The euro crisis is showing Europe the cost of doing too little too late. The EU should not repeat the same mistakes with the carbon market. The number of allowances needs to come right down or companies might as well be trading Monopoly money."

Joris den Blanken, EU climate policy director at Greenpeace

• "Today's proposal from the Commission is a good step forward, not least because it helps resolve some of the uncertainty and speculation we've experienced in recent weeks."

Jesse Scott, head of environment a power lobby Eurelectric

e_SBlt"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. This policy is risking Europe's industrial base and economic prosperity."

Gordon Moffat, director general at steel lobby Eurofer

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