UK wants EU ETS reform deal before end of 2015

15 July 2014 11:24 Source:ICIS

The UK wants EU countries to agree to ambitious structural reform of the EU emission trading system (ETS) before the end of 2015, its Department of Energy and Climate Change (DECC) has said a week ahead of a key country meeting on the matter.

The ETS was oversupplied by 2.1bn EU emissions allowances (EUAs) at the end of 2013, and there have been calls for this overhang to be eaten into in order to encourage low-carbon investment through higher prices.

However, the process of addressing the surplus has been slow.

“It is clear that greater action to tackle the surplus and strengthen the EU ETS is needed now,” a spokesman for the UK DECC said on Monday. “The sooner reform takes place, the sooner the [ETS]’s effectiveness as a driver for investment will be restored,” he added.

The spokesman also said that the DECC is calling on all parties to agree on a robust structural reform by the end of 2015 at the latest. “The UK’s preference is for permanent removal of an ambitious volume of allowances before 2020, but we are considering the potential role of a market stability reserve,” he said.

Stability reserve mechanism

The European Commission has proposed a market stability reserve to withhold allowances when the ETS is awash with carbon permits and release EUAs during periods of low supply.

Germany, an influential EU nation, has already called for the stability reserve to begin in 2017, four years before the commission’s proposed date, with the back-loaded volume going into the reserve instead of coming back and flooding the market.

Progressing the proposal through parliament has been halted by EU elections in May and the summer break. However, the appointment of a new rapporteur for the measure on Monday (see separate story) could see the matter progress again.

It is typically a lengthy process from proposing to passing EU legislation. However, the director of the European Commission’s climate unit, Jos Delbeke, has said that the parliament could decide by the first half of 2015 on whether to implement the stability reserve, meaning the desired UK time-line could still be realistic.

Bullish price signal

The UK’s comments could provide a bullish signal to the wholesale market, as speculative buying has already seen prices rise in recent sessions in the run up to an EU meeting on the reserve on 22 July. On Monday, the EU allowance benchmark December 2014 contract closed at €5.90/tCO2e – the highest settling value since 3 July, according to the ICE exchange data.

The EU Council, which represents the member states governments, will meet to discuss the proposed market stability reserve.

Typically, speculators buy up positions in advance of political meetings on reforming the EU ETS, before selling off allowances after the event to make a profit. Marie-Louise du Bois/Ben Lee

By Marie-Louise du Bois