Uncertainty over back-loading shape and timing remains
Despite a stronger-than-expected version of the back-loading proposal securing the backing of the European parliament on Wednesday, uncertainty still surrounds the final shape the measure might take and the timing of its possible implementation.
European lawmakers on Wednesday backed an amendment to the original proposal back-loading measure by the European Commission - considered a crucial short-term fix for the estimated 2bn oversupply in the EU Emissions Trading System (ETS). Members of European parliament voted to delay the sale of no more than 900m EU allowances (EUAs) during phase III (2013-2020).
But the measure can only be adopted once and after an assessment shows no significant impact on sectors particularly exposed to carbon leakage - the risk of losing business to countries with milder emissions legislation (see EDCM 3 July 2013).
At the same time, the politicians rejected another amendment which would have forced the Commission to re-introduce the back-loaded allowances in the system earlier than originally planned.
The next step will now be the EU states in the European Council approving the proposal - the outcome of which is still unclear as key countries such as Germany and Spain still have to come up with their formal positions.
Before the vote, analysts forecast prices could rise to €5.50 per tonne of CO2 equivalent (tCO2e) if the measure passed (see EDCM 1 July 2013).
Even though a stronger version passed, prices did not get to the forecast levels, as market experts said uncertainty is still high.
"We don't really know what the proposal will be and if the Council [will] add in any further restrictions, such as bringing back some of the terms of the failed amendments," said Trevor Sikorski, head of natural gas, coal and carbon at consultancy Energy Aspects.
In the short term, the vote is expected to continue supporting prices. "The vote was quite bullish so some people might sell here, but I would think more would buy," said a carbon analyst at a utility. "I would expect to see some more buying still and speculation around the €4.60-5.50/tCO2e area."
Prices rose after the vote on Wednesday but remained below €5.00/tCO2e.
Shifting to the medium term, the analyst at the utility said prices might move unpredictably and be volatile as a key role in driving them will come "from the news flow on member state support, or lack of, and German elections".
But he also pointed to the fundamental side. More auction supply is expected on the market as Poland said it will auction allowances this autumn (see EDCM 20 June 2013).
If back-loading jumps the final hurdles the impact will be broadly bullish, according to Sikorski. "Under almost any profile the prices rise but do not really get above €9.00/tCO2e before falling back," he said.
The timing for implementation remains uncertain too, with some mulling the chance that it might take place in Q3 '14 if the measure passes.
"I think the aim is Q2 '14, but I wouldn't be surprised if it even edged towards Q3 '14," the analyst at the utility said.
Experts agreed formal approval will be difficult to reach before the end of the year.
"I don't think we'll see any serious debate at the Council level before October - the German elections are slowing down the European debate on several fronts, and the new Lithuanian presidency doesn't seem too keen to push ahead," said Matteo Mazzoni, carbon analyst at consultancy Nomisma. This makes it difficult for the proposal to be agreed on before the end 2014, but then the Commission will have to produce an impact assessment under the amendment voted, he said. "And so we are already in Q1 '14 if not Q2 '14."
On the plus side, however, another amendment was scrapped which would have stripped EU countries of the freedom to use two-thirds of revenue from aucitons of the back-loaded EUAs, which might have slowed down Council negotiations.
Sikorski agreed that the Council debate could well go into late Q4 '13. "Then a change to the auction regulation has to be proposed and passed, followed by a good four-month process, so lucky to get it in by Q2 '14, but it's possible." Silvia Molteni
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