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Mixed reactions to linking EU carbon ETS supply to economic growth

04 Jun 2013 19:32:42 | edcm

A proposal to make the EU's Emissions Trading System (ETS) carbon allowance supply flexible by linking allocation to economic factors has split market analysts.

The European Commission is working on a structural reform proposal for the 2bn-credit-oversupplied ETS after holding a stakeholder consultation (see EDCM 10 December 2012). It aims to publish the proposal this autumn, its climate action director general, Jos Delbeke, said at the CarbonExpo in Barcelona, Spain, last week.

Delbeke suggested that a possible solution to the oversupply problem lies in linking factors influencing demand, such as economic performance, to the amount of EU allowances (EUAs) allocated. "What we have to fix, and where we had it not exactly right, is that the rate of economic growth ... is defining the absolute emissions cap - that's where the fix needs to be found," he said during a panel discussion.

"Fresh ideas" on how to address this arose from the consultation, he added.

Although it is not one of six structural reform options already on the table, several stakeholders, including trading associations, utilities and industrials, have proposed adding some flexibility to supply (see EDCM 8 March 2013 and 24 April 2013).

During at CarbonExpo, industry leaders said linking supply to historical production is a "root cause" of the present oversupply problem. Carsten Schirmeisen, cement maker Holcim's carbon business manager, said: "In the year 2018, the cement plants will be allocated allowances on the basis of what they produced in 2005-2007, ten years before. That cannot be right."

Divided merits

Analysts are split in their opinions on the merits of a potential dynamic supply mechanism.

On Monday, Jefferies Bache's carbon analyst, Matthew Gray, called it "transformational" as a bid to deal with the oversupply problem. "The European ETS is currently the only market in the world where demand changes in real time and supply is fixed for years in advance," he said in a research note.

But on Tuesday, Trevor Sikorski, head of natural gas, coal and carbon research at Energy Aspects, labelled it "not a great idea". Instead, he said the proposal raises "huge amounts" of questions, such as whether supply should be linked to actual economic activity - thus becoming reactive - or to forecasts instead. "And whose forecasts would you use?" he asked.

Timing and back-loading

Delbeke did not specify a timetable for implementing the potential mechanism.

Gray said a conservative timetable would see it agreed in ETS phase III and implemented at the beginning of phase IV. "The most logical approach would be to permanently remove a number of allowances to reflect the impact of the great recession and then make the cap adjustable to future shocks in economic growth," he said.

Sikorski pointed to another downside of such a mechanism. An ultimate cap would have to override any link to gross domestic product, he said, in order to avoid missing set emissions targets if the economy picks up in future. "So, if it is constrained by the cap, allocation would only then be timed to coincide with periods of higher demand and then it is something like permanent potential back-loading," he concluded. Silvia Molteni

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