Flexible carbon supply is structural reform frontrunner, lawyer says

The supply adjustment mechanism is the main frontrunner for structural reform of the EU emissions trading system (EU ETS), according to a climate lawyer.

The European Commission is seeking to reform the bloc’s troubled carbon scheme, plagued by a 2bn EU allowance (EUA) oversupply which has depressed prices to record lows.

Three options are on the table:

• creating a flexible supply mechanism or market stability reserve;

• permanently cancelling some EUAs;

• and revising the linear reduction factor (the percentage by which carbon emissions need to be cut every year).

“There is probably one main frontrunner and that is the market stability reserve. There is a number of sources saying that is the only realistic option because that is the only one that does not affect the total cap of allowances during phase III,” said on Thursday Graham Stuart, partner at legal firm Baker & McKenzie, at the Westminster Energy, Environment and Transport Forum in London.

Under this option , excess EUAs would be put into a reserve and would be made available again if demand rises.

He labelled this piece of information as speculation but “based on sources that seem to be reasonably well informed.”

“Anything which affects the phase III cap, or anything which really is about 2030 targets is unlikely to be formally proposed by the European Commission until European heads of state agree on the EU-wide reduction target for 2030,” Stuart added.

The permanent cancellation is the second frontrunner, he said, but it would affect the cap. Germany is also against it, which makes this option difficult ( see EDCM 27 November 2013 ).

European power companies favour an increase of the linear factor to 2.3% to 2020, from 1.74%, on the grounds that the ETS target is not aligned with targets further out.

The structural reform proposal, expected in January together with a policy paper on 2030 targets, might take the form of a discussion paper, but there is “some speculation” that it could be a full legislative proposal, said Stuart.

Politics-proof

Pierre Dechamps, adviser to the European Commission for energy and climate change at the Bureau of European Policy Advisers, said at the conference that the measure would have to block political intervention.

“If it is an algorithm and it is fixed, it cannot be interfered with,” confirmed Stuart.

Analysts say that introducing flexibility on the supply side of the ETS would make trading more difficult, as future scarcity would become harder to judge, and could reduce the volumes in the market or alternatively increase the price. Silvia Molteni