Carbon price collapses as back-loading proposal fails in European Parliament
Carbon prices crashed to five-year lows when the European Parliament voted against delaying some of the supply of emissions allowances on Tuesday.
The parliament's rejection of the European Commission's back-loading proposal is a blow to the EU emissions trading system (ETS) and has sparked fears that national governments will take over climate and energy policy.
As soon as the parliament voted against the proposal, the carbon price started to crash towards record lows, according to ICIS data. By afternoon, the December 2013 benchmark contract had fallen to €2.63/tCO2e, losing 45% in value from Monday's close.
Traders expect the no-vote to continue to crush prices to about €1.50/tCO2e in the next few sessions.
The market was volatile before the vote, with few traders saying they were fully factoring in either a negative or positive outcome.
The voting result was tight, with 334 members of parliament (MEPs) against, 315 in favour and 63 abstained. Opposition from the European People's Party (EPP) the largest in the parliament derailed the proposal (see EDCM 15 April 2013).
This is not a final vote on back-loading. The environment committee in the parliament now have to draft a new compromise text, but no deadline is in place.
The parliament might not have time to write and drum up support for a new version before the next parliamentary elections next year, sources say. The vote could spell the end for the back-loading proposal for most of phase III, as it took two years to arrive at the proposal rejected on Tuesday.
EU environment ministers are now set to meet twice in the next few days to come to a position on back-loading, according to Phil Hogan, who is in charge of the process under the Irish EU presidency.
The back-loading proposal comes under the EU's co-decision process, which means that both parliament and member states' governments through the EU environment council have to agree.
The back-loading proposal was designed as a quick fix for the oversupplied carbon market. The European Commission is currently investigating how it could structurally reform the ETS.
Climate action commissioner Connie Hedegaard said on Tuesday that the environment council's position would be key to this.
This overhaul could mean lowering the emissions cap in the EU and cutting the amount of allowances created, instead of just back-loading supply towards the end of phase III.
Industry associations like Eurelectric, IETA and CMIA all put out statements on Tuesday, saying that kind of radical overhaul is now the only way to save the ETS.
But such reform will take time. It would mean actually changing the directive underpinning the ETS, instead of just tweaking the auction calendar already agreed.
So far, there is no clear majority backing among EU states for that kind of reform. The commission is still just consulting with industry, and there is no time-frame for when it would put forward a proposal. Meanwhile, Tuesday's vote is damaging the ETS, according to many European policy-makers.
It shows a lack of support among current EU lawmakers for the bloc's flagship climate change tool, which was designed and made into law before many of them were elected.
One parliamentary rapporteur on the ETS, Peter Liese, said: "I really don't know what will happen next, [I] don't know what room there is for compromises to be struck."
Matthias Groote, parliament's environment committee chairman, said: "It hasn't been the best of days for the ETS, nor for the European parliament, nor for progress. Today was pretty much a destructive day."
MEP Eija-Riitta Korhola, who had led the opposition to back-loading, said any change to the ETS should only happen when the EU's 2030 climate goals are set, instead of intervening in the market in the meantime.
That indicates that another back-loading proposal, even if watered down, would meet similar opposition. A Commission proposal for carbon targets for 2030 is not expected until the end of the year.
Many politicians have now warned that a climate action vacuum at EU level could also accelerate the emerging trend for countries to devise their own carbon policies. The UK has already set a carbon price floor separate to the ETS, while subsidies for renewables are widespread across the EU.
Carbon prices traded near zero towards the end of phase I of the ETS, when it became clear the EU had handed out more allowances to industry and power generators than they then needed to cover their emissions. Overallocation happened again in phase II, partly because of the recession, and the surplus has been banked into the current phase III.
Supply in the ETS is set in advance, based on historical emissions and benchmarks, and there is no clause in the current legislation that allows adjusting this supply to react to a fall in demand. Silvia Molteni and Marie-Louise Du Bois
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