Back-loading vote delayed until 2013
Carbon prices crashed on Friday as it emerged that a formal vote on the back-loading proposal would be postponed until next year.
Market participants had hoped that the Climate Change Committee (CCC) would vote on the proposal at its meeting on 13 December, but the European Commission's confirmation that it was still in the process of clarifying member states' position on the matter highlights the political and bureaucratic risks the potential back-loading faces.
In a statement released on Thursday, the Commission called on member states to declare whether they are for or against back-loading 900m EU allowances (EUAs) over the coming fortnight.
The back-loading proposal suggests holding back 400m EUAs in 2013, 300m EUAs in 2014 and 200m EUAs in 2015. It then also proposes to load 300m EUAs in 2019 and 600m EUAs in 2020 back into the system.
Member states have been sent a draft amendment to the phase III (2013−2020) Auctioning Regulation, which includes the back-loading amendment, and have until the December meeting to clarify their positions.
However, member states have opposing positions on the back-loading proposal. Hungary has previously refused to confirm whether it supports a delay to carbon allowance auctions to boost prices, while Slovakia has indicated that, while it is in favour of auction delay in principle, it may differ from the Commission on the actual volume to be delayed (see EDCM 19 September 2012).
Meanwhile, Poland has repeatedly said it opposes the Commissions' proposal and that it wants to see "in-depth impact assessment at country level" before properly discussing the proposal (see EDCM 9 October 2012).
But the ongoing uncertainty over member states' positions on the proposal is starting to weigh on prices, according to Jefferies Bache carbon analyst Matthew Gray.
"Currently, Poland is trying to orchestrate a revolt among Eastern Bloc nations, Italy wants taxation instead of trading, and the German economic and environment ministers are arguing like UNFCCC [UN Framework Convention on Climate Change] negotiators," he said in a briefing note on Friday. "We have put Poland and Italy on high risk [to oppose the proposal] and the Eastern Bloc countries on medium risk," Gray added.
As Germany has emerged as the bloc's "superpower" over the course of the recession, smaller member states are unlikely to back a proposal that goes against the country's approval. This means that the vote will "undoubtedly flop", Gray predicted.
In addition to the uncertainty surrounding political backing for the amendment, the proposal is also shrouded in legislative uncertainty. The Commission confirmed that the CCC will not vote on the proposal on 13 December, which introduced renewed uncertainty over when the allowance surplus would be addressed.
"The agenda for the December Committee meeting does not, however, invite them to adopt a formal opinion (vote) at the meeting," the Commission said.
Rather, the CCC is expected to delay this and only adopt a formal opinion as soon as co-legislators have agreed on the proposed EU's emission trading system (ETS) directive clarification.
"This means the vote will occur at some stage in the new year," Gray pointed out.
Once it has occurred, the European Council and Parliament need to scrutinise the amendment, and only then can the Commission formally adopt the back-loading amendment of the ETS regulation.
Due to the lengthy legal process that the back-loading proposal has to undergo, analysts have suggested that − at the very soonest − it could be adopted in Q2 '13, but Thursday's developments suggest this could be even later.
"We are of the understanding that officials are seeking to accelerate the plenary vote and the three-month scrutiny period. Hopefully, these officials understand the problem. If the proposal is not ratified by June 2013 then recess will delay implementation to Q4 2013 at the earliest," Gray said.
If adopted, the back-loading proposal would help ease the pressure on bearish carbon prices, which have shed value rapidly over the course of phase II, as the glut of allowances has steadily grown amid a recession-driven drop in emissions. But until then, the regulatory delays will depress prices further, Gray suggested.
"While the traders look for clarity, the market will have to contend with around 20m tonnes of volume per week. Demand is currently strong - this morning Germany sold 3m tonnes [of] spot EUAs at €6.23 [per tonne of CO2 equivalent] − but this is blatantly unsustainable," he added. MLDB
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