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Upside looks limited at €5.50/tCO2e if back-loading passes

01 Jul 2013 18:27:44 | edcm

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Analysts see limited upside potential for carbon prices if the back-loading proposal passes European parliament plenary scrutiny on Wednesday, in a vote many say is still too close to call.

To increase the proposal's appeal for MEPs who rejected it in April, and thus boost its chances of passing a second vote, the parliament's environment committee has watered down the original text of the European Commission (see EDCM 19 June 2013).

"Since the committee proposed its compromise, market sentiment has grown more optimistic towards the planned temporary reduction of the supply of EU allowances," UniCredit's commodity analysts said in a note on Monday.

The bank said that in the event of a positive vote, the EU allowance (EUA) benchmark could rise to a maximum of €5.50/tonne of carbon dioxide equivalent (tCO2e) - a level that would exceed those at which the contract has closed in 2013 to date, ICIS data shows. On Friday, it closed at €4.35/tCO2e.

Consultancy Nomisma's carbon analyst Matteo Mazzoni agreed with UniCredit's predicted level.

"But the upward trend will have a very limited length, as the measure is unlikely to get the final green light before the end of the year," he added.

Although market sentiment is optimistic that the vote will pass, analysts still view the outcome as highly uncertain.

"The vote could still go either way," said UniCredit, as diverging views within participating parties, in particular the European People's Party (EPP), make it likely that some MEPs will vote against party lines.

A clearer picture might come on Tuesday, when the EPP - the largest in the parliament and crucial in the first rejection - will try again to agree a common position for the vote on Wednesday (see EDCM 25 June 2013).

Analysts expect large downside potential if MEPs once again reject the proposal, with UniCredit pointing to a €3.40/tCO2e limit and another source expecting the benchmark to fall as low as €2.00/tCO2e.

Support from EU ministries

Meanwhile, twelve European environment ministers once again backed the proposal.

Echoing a joint statement ahead of the first vote, ministers including Edward Davey (UK), Peter Altmaier (Germany) and Delphine Batho (France) expressed support for the measure, which they say could fix the EU emissions trading system (ETS) in the short term until it can be structurally reformed.

Rejecting key objections often cited against back-loading, the ministers said it would not impact carbon leakage prevention measures, as back-loading would remove allowances from EU countries' auctioning pots, and that global fossil fuel prices mainly drive energy costs. Opponents of the measure often argue that it would push up energy prices and damage EU industry competitiveness.

The ministers also called on the European Commission to bring forward, by the end of the year at the latest, proposals to structurally reform the EU ETS and to define Europe's low carbon ambition beyond 2020.

The Commission replied via Twitter that it already expected this time frame to apply.

In a separate statement, over 40 companies - among them utilities and industry bodies including Spain's Iberdrola, Italy's Enel, power lobby Euroelectric and the international emissions trading association - welcomed the ministers' call for a yes-vote on Wednesday.

Green lobbies CAN Europe and WWF also expressed support in a statement on Monday, but added that back-loading "must be immediately followed by more long-lasting ETS structural reform, starting with cancellation of back-loaded allowances." Silvia Molteni

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