EU to propose phase IV supply reserve and gradual re-loading

17 January 2014 18:03 Source:ICIS

The European Commission could propose next week that a tool to adjust the supply of carbon allowances (EUAs) in the EU Emissions Trading System (ETS) is applied from phase IV of the scheme, according to a draft obtained by ICIS on Friday. The EU executive body could also propose that the permits back-loaded from 2014-2016 auctions are reintroduced more gradually than previously expected, the document shows.

The changes will be put forward as a full legislative proposal amending the directive underpinning the EU ETS on 22 January, the same date in which the 2030 climate and energy framework is due.

The draft was circulated by well-informed sources which however warned it might still change.

Gradual re-loading

The structural reform proposal is the next step for addressing oversupply in the scheme, which has seen a growing surplus of EUAs pressuring prices to record lows, following the approval of back-loading in December.

Over 2014-2016, the auction volume will be reduced by 900m EUAs as part of the measure, to be put back in 2019-2020.

The Commission will now propose that the back-loaded EUAs are reintroduced in the scheme more gradually.

The amendment reads that if the auction volume in the last year of each phase exceeds by more than 30% the expected average auction volume for the first two years of the following phase, 66% of the difference between the volumes will be shifted and equally spread to the two following years.

Market stability reserve

Making the supply side of the scheme flexible and able to react to changes in the economic picture ( see EDCM 6 January 2014 ), was largely expected to be chosen by the EU executive as the tool for structurally reforming the scheme.

In order to create the reserve:

• the Commission will publish the total number of EUAs in circulation each year starting from May 2017;

• such number will be calculated as the cumulative number of EUAs issued since the start of phase II on 1 January 2008 including the offsets entitlements, minus the verified CO2 emissions covered by the scheme over the same period, any cancelled permit and the number of EUAs in the reserve;

• in each year starting from 2021, 12% of the EUAs in circulation two years before, and published on year before, will be put in the reserve, unless this number of allowances is less than 100m EUAs.

Once the reserve is created, if in any year the total number of EUAs in circulation is lower than 400m, 100m EUAs – or if less, the amount which is in the reserve – will be released in auctions. Silvia Molteni

By Silvia Molteni