The year in review: EU allowances
The end of 2012 is also the end of phase II of the EU emissions trading system (ETS). As the last year of the current phase, 2012 has been an important year for the carbon market, which has seen a number of issues being debated - and some of them left unresolved.
Here is a recap of the most important issues affecting allowances in 2012 and beyond:
• Price crash
The EU allowance (EUA) benchmark contract shed 26% of its value over the course of the year, ICIS data show.
Between the start of December 2011 - when the December 2012 contract became the benchmark - and the end of November 2012, when it expired, the contract went from closing at €8.40 ($11.15) per tonne of carbon dioxide equivalent (tCO2e) to €6.20/tCO2e. At its highest, the contract closed at €9.35/tCO2e on 24 February, but fell as low as €6.10/tCO2e on 4 April 2012.
The average closing value for the contract was €7.60/tCO2e, the data show, which is 81% lower than the 2011 benchmark average of €13.80/tCO2e.
The 2012 average is also the lowest of all the phase II (2008-2012) years, which stood at €14.40/tCO2e in 2010, €13.50/tCO2e in 2009; and €22.60/tCO2e in 2008.
After much delay, the European Commission finally confirmed in the second half of this year that it would back a proposal to back-load allowances from the ETS in a bid to address its oversupply.
Its published proposal suggests holding back a total of 900m EUAs in phase III of the EU ETS - 400m EUAs in 2013, 300m in 2014 and 200m in 2015 - and then reload 300m EUAs in 2019 and 600m EUAs in 2020 back into the system.
A vote on the proposal is due in 2013. Market participants had hoped that the Climate Change Committee (CCC) would vote on the proposal at its meeting on 13 December, but the Commission's confirmation that it was still in the process of clarifying the position of member states on the matter highlights the political and bureaucratic risks the potential back-loading faces.
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.
Meanwhile, Poland has repeatedly said it opposes the Commissions' proposal and that it wants to see an "in-depth impact assessment at country level" before properly discussing the proposal.
Germany, the bloc's most influential country, has failed to come to a coherent position that would allow it to back the proposal - analysts have identified this as the largest political risk threatening the proposal.
The CCC is due to vote on the matter in 2013, but will only be able to adopt it if the political bottleneck can be resolved.
The European Commission has delayed confirmation of national implementation measure (NIM) plans, which were expected to be approved by mid-year.
The NIMs set out how many free EUAs industrial companies will be allocated in phase III, based on the Commission's new emissions benchmarks.
EU member countries were in charge of drafting the plans, and the Commission has to check that they are in line with the phase III cap before approving them.
Germany has proposed awarding installations 1.4bn EUAs for free between 2013 and 2020, Swedish installations could be awarded just over 216.9m EUAs, while the Netherlands has asked for 407m and Poland for 404.6m in phase III. The delay is due in part to late submissions from member states.
After the UN's International Civil Aviation Organisation failed to deliver a deal on international aviation emissions, the EU included the sector in its ETS for the first time as of 1 January 2012.
It created a new type of credit especially for airlines - the EU aviation allowance (EUAA) - which is an emissions right that allows airlines falling under the EU ETS - those that have flights landing or taking off from the EU - to pollute one metric tonne of CO2.
The EU created EUAAs and member states issued them to airlines. An unlimited number of EUAAs can be used for compliance.
While the EU insisted the move to make airlines pay for the emissions was legal and irrevocable, it backed down in November in the face of international pressure - suspending at least international airlines from having to comply with the system. EU-based airlines, however, will still have to comply with the ETS in 2013.
The European Commission set emissions benchmarks for airline operators last year. One allowance represents 1tCO2e. In 2012, airlines received 0.6797 EUAAs for free for each 1,000 tonne-kilometre reported for 2010. The tonne-kilometre is a measure of the distance travelled and the total weight of load and passengers of flights in 2010. The EU will review its suspension decision in 2013.
• ETS linking
The EU and Australia - the world's two largest carbon markets - announced this year that they would link up their emissions trading systems.
Australian firms will be able to meet up to 50% of their carbon needs using EUAs from 1 July 2015.
EU Climate Commissioner Connie Hedegaard has pledged that the two systems will be fully linked no later than July 2018. This would allow Australian carbon credits to be used for EU compliance.
However, such an amendment to the EU emissions trading system is likely to take some time to implement because it would require a mandate from both member states and the European Parliament, according to the International Emissions Trading Association.
Australia's big emitters, which have lobbied the Australian government for concessions, could find their bargaining power reduced if the scheme is tied to the EU ETS. MLDB
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