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New text boosts carbon back-loading chances, but waters down impact – analysts

13 Jun 2013 20:31:51 | edcm

New compromise amendments could let the back-loading proposal pass the European parliament's scrutiny more easily, but only to make subsequent negotiations among EU countries longer and while watering down the measure, experts told ICIS on Thursday.

Following a "shadow" meeting of senior members of parliament's Environment Committee (ENVI) on Tuesday, further changes were made to two compromise amendments previously put forward by ENVI chairman Matthias Groote (see EDCM 11 June 2013).

The amendments reiterate that the back-loading can be applied only once in phase III (2013-2020) of the EU Emissions Trading System (ETS). Also, they state it can only be implemented once it has been assessed and established that it would not have a significant impact on sectors categorised as being exposed to carbon leakage risk and for a maximum number of 900m EU allowances (EUAs).

Members of parliament (MEPs) in the committee will vote on the amendments on 19 June. The parliament's vote is then set for 2 July.

The new compromise will boost chances of a positive vote in the Parliament, said managing director Jan Frommeyer of German Tschach Solutions, which was acquired by ICIS last week.

"I reckon there will still be a huge number of MEPs against it, but it looks like this time it has some chances to get a higher share of votes," agreed Nomisma's carbon analyst Matteo Mazzoni.

However, environmental broker Vertis' carbon analyst Bernadett Papp said that although the ENVI vote was widely expected to pass, the plenary vote next month was still "too close to call".

Earlier re-loading

The new draft, seen by ICIS, shows that the EU could return any allowances back-loaded to the market sooner than previously expected.

The original auction profile proposed by the European Commission - not included in the current discussions, which instead concentrates only on the EU executive's actual powers to apply change to the auctioning calendar - indicated that 900m would be withheld from 2013-2015 to be back-loaded in 2019-2020.

The new draft instead stipulates that the allowances withheld "shall be reintroduced in a predictable and linear manner starting from the year following that during which allowances have last been withheld."

This means that the potential upside from back-loading would be maintained for a much shorter period than under previous proposals, said Trevor Sikorski, head of natural gas, coal and carbon at consultancy Energy Aspects. "Prices will start coming down again much earlier than if held until 2019," he said.

Given that a change in the original proposed profile will be necessary, since analysts predicted that 2013 is too soon (see EDCM 9 May 2013), 2017 could be the year in which the re-loading starts.

Less revenues from auctioning

The new amendments also clearly earmark 600m EUAs for the creation of a fund to finance "innovative low carbon technologies" to be based on the NER300 funding mechanism.

This mean that some money that EU countries could previously expect to generate from EUA auction and spend freely would now be allocated for them centrally.

While they were to cash in on revenues for 900m EUAs, the latest changes to amendments would leave them with only revenue from 300m EUAs. EU countries at the moment are forced by EU law to use only 50% of revenues from carbon allowance auctions to fight climate change.

The creation of such fund was also put forward by the Commission in an action plan to help the steel sector's competitiveness, but some have warned that unless real and lasting action is taken on the oversupply, the carbon price will be too low to meet the costs of such technology (see EDCM 12 June 2013).

But these changes could make it harder for the back-loading proposal to pass the European Council scrutiny, some experts warned on Thursday. "Member states will not like that idea and this has the potential to delay the final passage," Frommeyer said.

"I think there is little likelihood that such proposals would be approved by the Council of Ministers as basically you are spending government revenue for them," said Sikorski.

According to Green MEP Bas Eickhout, "member states' revenues are always a very difficult issue; some don't want any EU-say in it at all. Especially [the] UK".

Political support

On the other hand, the changes could sway the previously opposed lawmakers in the European People's Party - the parliament's biggest party and a key opposer of the measure in the last vote - to back the newly amended proposal. However, those that had supported the original proposal, could now vote against it in protest of it being watered down. Opposition from the Green party emerged on the compromise on Thursday.

"Clearly, the current compromise amendments that are on the table can't be supported by the Greens," Eickhout told ICIS, pointing to the fact that the amendments weaken the proposal.

"Once everyone grasps the entire weakening of the proposal, markets will see this will do nothing," he said on Twitter. Papp remarked that this development could still leave the proposal unlikely to pass. Silvia Molteni

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