The European Commission has published its backloading proposal, two days before it was due, which has been cautiously welcomed. However, some have warned the timing and approval of the process could still face challenges, while others have called for deeper and more permanent action to fix the oversupply bearing down on the EU emissions trading system (ETS).
The submitted proposal suggests to hold back 400m EU allowances (EUAs) in 2013; 300m EUAs in 2014; and 200m EUAs in 2015. It then proposes to load 300m EUAs in 2019 and then 600m EUAs in 2020, back into the system.
Carbon prices rose ahead of the backloading proposal's publication, with EU allowances closing 0.93% higher on average at Monday's close, according to ICIS data. But market participants reported a weak open after the document's late publication on Tuesday.
Even though the proposed figure is around what was expected, it has sparked mixed reactions from stakeholders.
"Considering Europe's macroeconomic problems, this proposal is the best the market could hope for," said Jeffries Bache analyst Matthew Gray in a briefing note on Tuesday.
The International Emissions Trading Association (IETA) welcomed the move
"The EU needs to restore confidence in the ETS, which is still functioning despite challenging economic circumstances," IETA's CEO Dirk Forrister said.
E.ON CEO Johannes Teyssen said in a press conference: "We welcome the decision to set aside 900m certificates. That's the only way that the modernisation of European power plants will happen. Current price signals say that climate protection is not necessary."
IETA added, "We welcome the release of the Commission's proposal, which improves clarity for market operators after many months of discussions."
But, as the end of phase II is now only weeks away, the IETA urged the EU to adopt the proposal swiftly while taking further action to fix the ETS.
"We now call on the Commission, Parliament and Member States to act promptly on this backloading proposal and to simultaneously start a discussion on structural reforms of the EU ETS."
Gray also stressed the need for quick action on the proposal.
"The market needs clarity on whether the comitology vote [a decision process at the EU] (potentially on 13 December) can occur before the codecision vote in Q1 2013."
Deutsche Bank, in another briefing note also published on Tuesday, said it only expected the proposal to be finalised and adopted in late Q2 2013 at the very earliest, even if the Commission's proposal is received positively by the Climate Change Committee, Parliament and Council.
"However, given the opposition to this proposal that exists in some quarters, the risk is that this timeframe is over-optimistic, and the 900m number proposed by the Commission may be subject to revision in the negotiations that will now follow," Deutsche Bank added.
Temporary or permanent?
Rémi Gruet, senior adviser for climate and environment at the European Wind Energy Association (EWEA), protested that backloading 900m allowances was too small a volume to restore the carbon market, pointing out that the Commission has estimated the oversupply to reach 2bn by the end of 2013.
EWEA warned that low carbon prices would create incentives for carbon-intensive investments instead of directing money towards clean or renewable projects, and that this will be exacerbated as the ongoing economic difficulties are likely to grow the oversupply.
"The back-loading does not affect the overall volume of allowances to be auctioned in phase III, only the distribution of auction volumes over the eight-year period," the Commission pointed out.
But Jeffries Bache said the proposal itself could already be enough to support the market long-term.
"Back loading at the very end of phase III will be enough to scare the bears, because it maximizes the potency of the Hedegaard put," Gray said.
"The threat of intervention is all that matters and the belatedness of the back loading maximizes the chances of permanent removal," he added.
Gray argued this should therefor be seen a permanent, rather than a temporary, intervention in the market, and said Jeffries Bache would revise its projected phase III prices upwards.
On Wednesday, the Commission will adopt a report on the EU ETS that sets out potential structural changes to address the supply and demand imbalance.
"Such reforms are essential to clarify that the backloading proposal is a one-off intervention proposed to address the growing imbalance between a fixed supply and a significantly lower than expected demand and ensure that no further change in the auction time profile will be deemed necessary in the future," IETA commented. MLDB