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Carbon sold off as ENVI votes yes to back-loading

19 Feb 2013 18:36:38 | edcm

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Carbon prices fell on Tuesday after the day's widely anticipated positive vote by the European parliament's environment committee (ENVI) in favour of the EU emissions allowance back-loading proposal.

The vote boosts the European Commission's plan to delay the auctioning of 900m EU allowances (EUAs) in phase III (2013-2020) of the bloc's emissions trading system (ETS).

ENVI gave the proposal the green light, with 38 members voting for it, 25 against and two abstaining.

The market had expected a positive outcome, with one expert predicting that 37 would be in favour and 26 against (see EDCM 18 February 2013).

The committee's approval sets the scene for negotiations at member state level.

As the positive vote was widely anticipated on the market, it had already been largely priced in. The EUA benchmark contract price rose by more than 20% in the past week, from €4.45/tonne of CO2 equivalent (tCO2e) on 11 February to €5.40/tCO2e on 18 February, according to ICIS data, as traders took up long position ahead of the vote.

On Tuesday, those positions were sold off as participants looked to lock in profits and the price headed south early in the session. By the end of play, the benchmark contract had shed €0.70/tCO2e since Monday's close.

Jefferies Bache carbon analyst Matthew Gray labelled the sell-off "inevitable", as the EUA benchmark had rallied by more than 50% since the start of the month, "making it the biggest 10-day rally ever" as expectations of a positive vote boosted prices in the run-up to the vote.

Market reaction

Proponents of the back-loading proposal welcomed the definitive majority with which the ENVI vote was passed. While it has no formal effect on whether the back-loading goes ahead, it does provide greater political certainty for the proposal's future. The result also fended off attempts to water down the conditions under which emissions allowances could be back-loaded.

The EU commissioner for climate action, Connie Hedegaard, hailed the result on Twitter as "clear and positive". The committee's chairman, Germany's Matthias Groote, tweeted that it was "a good day for EU climate politics".

But environmental and industry lobby groups urged the EU to go further to curb - and not just delay - supply in the market.

"[The EU] must now press ahead to withhold these allowances from auction, before making the permanent repairs that the scheme desperately needs," Sandbag's Damien Morris said.

Power-industry lobby Eurelectric's secretary general, Hans ten Berge, said: "We are relieved to see that the environment committee has recognised the importance of strengthening the ETS in the short term through a back-loading of allowances" but also said the Commission must pursue structural changes to safeguard the ETS' future as a carbon-reduction tool.

Next steps

While the committee backed the proposal, it did not vote in favour of starting "trilogue" negotiations for a final position on the proposal. The trilogue is a process of meetings between the parliament, the European Council and the Commission. The next step for the proposal is another vote next week on whether to give Groote a mandate to negotiate with member states.

Germany, which has a large number of the votes in the Council, remains undecided on the matter. However, Gray said he is optimistic that it will back the proposal because higher prices support its nuclear decommissioning plan and its push for renewable energy. However, he warned that manufacturing, the power-house of Germany's economy, will continue to lobby against the proposal.

A full-session, or plenary, vote on the proposal in the European parliament is scheduled for 15 April.

Until the EU reaches a final decision on curbing or postponing carbon credit supply, almost daily auctions will keep churning more allowances into an already oversupplied market. Marie-Louise du Bois

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