Stability reserve start unlikely in phase III of EU ETS - traders

23 May 2014 15:47 Source:ICIS

Market participants doubt there will be long-term structural reform of the EU emissions trading system (ETS) before 2020, despite unconfirmed reports this week that the European Commission would be open to the idea.

The commission in January proposed a 2021 start date for a market stability reserve mechanism to tackle a grossly oversupplied EU carbon market ( see EDCM 22 January 2014 ). The reserve would operate by the European Commission holding back emissions allowances from auctions during periods of oversupply and releasing them when the system is undersupplied.

A Thomson Reuters Point Carbon report on Tuesday mentioned Jos Delbeke, the director of the climate unit at the commission, as having said on the sidelines of a conference that the commission would not be against an earlier start date for the reserve.

The commission would not confirm the accuracy of these quotes when contacted by ICIS.

Nevertheless, the market reacted, with the benchmark EU allowance (EUA) contract pushing up to €5.21/tCO2e at Thursday’s close, from €4.75/tCO2e on 19 May.

Despite this, market participants told ICIS that they do not believe the reserve will be implemented in phase III of the EU ETS.

“I’m not confident that this is going to happen,” a source at a trading house said.

Lengthy approval process

The market stability reserve needs a complex system of approvals – from the EU parliament to the EU council which represents countries.

One trader at a utility highlighted the difficult and lengthy example of getting approval for back-loading auctions, an earlier supply fixed proposed by the commission. Back-loading is a temporary measure which delays 900m of EUA auction supply until later in phase III of the ETS.

Back-loading was first proposed in November 2012, but it took until March this year before it actually began.

The temporary carbon market fix was met with strong opposition from some parliament members and EU countries before it was eventually given final approval ( see EDCM 21 January 2013 ).

Although a number of states such as Germany and the UK have called for an earlier beginning to the stability reserve, wide backing from many countries has not yet been forthcoming.

The soonest the stability reserve could begin is 2016, but it is likely to take longer, the trader at the utility said.

Stability reserve wanted

Market participants are keen on long-term carbon market reform to address the current glut of carbon permits in the EU ETS, which is pushing down prices.

“There’s no chance of absorbing the oversupply just with an improvement in the economic cycle,” a third trader said.

The surplus has built up as the EU decided how many emissions allowances to create based on historical emissions from industry, applying a relatively small cut from this business-as-usual scenario. As the recession cut production in many industrial sectors, emissions actually fell below the historical levels. Before back-loading, EU law did not allow any changes to the pre-determined supply to react to this kind of change.

The EU confirmed last week that the oversupply in the EU ETS rose to 2.1 billion carbon permits in 2013, up 5% on 2012 ( see EDCM 15 May 2014 ). Ben Lee

By Ben Lee