Consensus on EU ETS structural changes lacking

Market participants have cautiously welcomed a proposal to make potentially radical and lasting changes to the EU’s emissions trading system (ETS) but lack consensus about their preferred option for tackling the oversupply, depressing prices.

The European Commission adopted and published its report on potential structural changes on Wednesday in a bid to address the long-term crisis stemming from a vast surplus of carbon credits in the ETS.

As the surplus is already weighing on prices and is expected to do so beyond phase III (2013-2020), the Commission has proposed a two-step approach that offers both temporary and more permanent ways of boosting CO2 prices.

The first step is a back-loading proposal that could delay the auctioning of 900m EU allowances (EUAs) until the end of phase III (see EDCM 13 November 2012). This is generally considered a temporary fix.

The second step seeks a more permanent solution to the long-term oversupply. Wednesday’s report – a draft of which was leaked last month (see EDCM 23 October 2012) – proposes “six options” for doing so.

Potential structural changes

The EU’s ETS surplus stood at almost 1bn in early 2008, according to Commission figures, and is predicted to rise significantly between phase II and III, with a surplus of 2bn allowances expected by 2020. Thus, even if 900m EUAs are delayed, further changes could be needed to balance out demand and supply in this market.

The six options are:

• Tightening the EU’s carbon-reduction cap from 20% to 30% below 1990 levels by 2020 – backed by some states, including Germany, but opposed by others, including Poland (see EDCM 17 August 2012);

• Permanently removing a share of the supply from the system – which would require separate “primary legislation” to the existing ETS Directive by the EU parliament and the European Council;

• Increasing the annual rate at which emissions have to be reduced in the ETS;

• Including more carbon-intensive industries, such as shipping and agriculture, in the ETS;

• Reducing or banning the use of international carbon offset credits from the ETS after 2020; and

• Introducing “discretionary price mechanisms” such as a carbon-price floor, or “a price management reserve where allowances are deposited in case of excessive price decreases”.

Stakeholder views

Europe’s power-sector lobby, Eurelectric, welcomed the second, structurally-focused, proposal. It backed “an ambitious, firm, long-term, economy-wide” carbon reduction target for 2030 and 2050 and a corresponding ETS cap, as well as including more sectors within the system. As structural changes to the ETS would probably require a lengthy legislative process, Eurelectric also welcomed more immediate back-loading.

The Commission has passed the back-loading proposal, which forms a draft amendment to the EU’s ETS Auction regulation, to the Climate Change Committee, which is due to comment before the end of phase II, and will launch a formal consultation on it soon.

The structural proposals were also welcomed by the International Emissions Trading Association (IETA) as a way to avoid repeated intervention that exacerbates uncertainty.

However, it said: “Given the gravity of the issues at stake, IETA expresses concern that the Commission appears to be considering only a limited number of options – at this early stage in the debate, now might not be the best time to rule out particular options.”

Finnish utility Fortum only backed the option to increase carbon cap ambitions by 2030, rather than 2020, and opposed the curbing of, for instance, international credits in the system, adding that the 900m back-loading volume probably “will not impact the market price significantly nor decrease market volatility”.

Non-governmental organisation CDM Watch, however, strongly supported the move to limit the use of offsets such as certified emission reductions (CERs) and emission reduction units (ERUs) in the ETS, urging the EU to ban them even sooner than proposed.

It said such credits account for 75% of the 2bn surplus and criticised the EU’s suggestion to restrict them only pre-2020,”despite new evidence that a large amount of offset credits haven’t delivered real reductions and are leading to a net increase of 1.6bn tonnes of CO2 by 2020″. MLDB