EU Council formally adopts back-loading

16 December 2013 14:48 Source:ICIS

A change to EU legislation clarifying the European Commission’s powers to change the carbon auction calendar finally became law on Monday, paving the way for the implementation of back-loading – a plan aimed at supporting prices by delaying some of the scheduled supply.

The Agriculture and Fisheries Council of the European Union formally signed off without discussion the amendment to the directive underpinning the EU Emissions Trading System (ETS) on Monday, ending a long and difficult legislative process which has seen three plenary votes in the European Parliament and has kept the market holding its breath for months.

Besides providing legal certainty, the amendment stipulates that back-loading can be implemented only once in phase III of the EU ETS, for no more than 900m EU allowances (EUAs) and only after an assessment shows no significant impact on manufacturing sectors particularly exposed to the risk of relocating outside the bloc.

With the legal clarification made law, in order for the plan to start now EU countries in the Climate Change Committee (CCC) need to vote on how to amend the auction calendar. The vote is likely to take place in January, but countries already said the preferred option is removing 400m EUAs in 2014, 300m EUAs in 2015 and 200m EUAs in 2016, with the possibility of spreading some of the 2014 volumes over the following two years in case of a late start. Then, 300m will be reintroduced in 2019 auctions and 600m in 2020 auctions on top of the annual auction volume.

The measure was put forward by the European Commission in order to temporarily address oversupply in the system, which has weighed prices down to record lows, while working on structural reform of the system.

At the end of phase II there were around 2bn allowances more than verified emissions up to that point. However, 1.2-1.3m of this EUA oversupply has already been bought by utilities to cover emissions from forward power production, ICIS analytics firm Tschach Solutions estimated, pegging the net oversupply of the system at 700-800m EUAs – lower than the amount of EUAs that will be back-loaded.

Analysts’ forecasts for carbon prices lack consensus, but there is agreement that with back-loading prices will reach phase III highs in 2018. The forecast for 2014 varies from a minimum of €5.50/tCO2e to a maximum of €12/tCO2e. Silvia Molteni

By Silvia Molteni