Following a markedly bearish week for the carbon market, the European Commission on Monday urged member states to act quickly to pass the back-loading proposal that it said could start to be implemented immediately after its summer break, should approval be granted smoothly.
The benchmark EU allowances (EUAs) 2013 contract has been plunging in the last few sessions, falling to record lows in week 3 and showing no sign of recovery at the start of week 4.
"I urge the member states and the European parliament to act. They now have the rules presented by the Commission, they have to act swiftly and with determination," said a spokesman for the Commission, adding that the market could crash if nothing was done.
"There are too many allowances in the market [to be absorbed by the market]... Why are we flooding a market which is already oversupplied?," the spokesman said, referring to estimates that 2 billion EUAs were neither being traded nor being used to reduce emissions, but were instead just being banked or kept by companies.
Despite analysts being sceptical regarding any back-loading implementation earlier than the fourth quarter of 2013 (see EDCM 8 January 2013), the Commission said that this could happen straight after the summer break.
"I understand from the European Parliament that they expect plenary voting in March-April this year. Once we have the go-ahead in the parliament, member states will discuss the proposal in the Climate Change Committee," the spokesman said.
However, he did not provide a fixed date when member states will vote. "The Commission's idea is as soon as possible without delay after the parliament has voted. This would allow us to start withdrawing permits in the next auctions that will take place after the summer recess."
German regional elections 'bearish'
The path of the proposal, however, does not seem certain as Poland has firmly expressed opposition (see EDCM 11 January 2013) while Germany, whose green light is considered crucial for the final approval, still has to agree on it (see EDCM 12 December 2012).
The German regional elections on Sunday were expected to provide some indication of the country's likely future position on the matter, but failed to do so.
While there is support from environment minister Peter Altmaier, economy minister Philipp Rösler, of the Free Democratic Party (FDP), is against it.
The result of the vote in Rösler's home state of Lower Saxony was being seen as a crucial popularity test for him, and his party did well.
A carbon analyst at financial firm Jefferies Bache said this was bearish news for the market.
"Sunday's vote may calm intense recent speculation over whether the FDP will force out their embattled leader [Rösler]," he said.
A second reason is that Chancellor Angela Merkel's party has now lost control of Lower Saxony. "This potentially reaffirms our fear that Merkel may not step in to break the back-loading deadlock until after the Federal elections." SM