EU to Sell 300 Million CO2 Permits by End-’12 for Aid

The European Union said it will sell 300 million carbon-dioxide permits by the end of 2012 from a reserve to spur clean-energy projects and vowed to “minimize” the impact of the sales on market prices.

The European Investment Bank will sell the 4.3 billion euros ($6 billion) of CO2 allowances from the post-2012 reserve for new companies in the EU emissions-trading system and disburse the revenue via national governments to aid projects for carbon capture and storage and renewable energy. The volume to be sold is about 15 percent of an average annual quota in the current five-year trading period that started in 2008.

The EIB is the 27-nation EU’s lending arm and the 300 million permits from the so-called new entrants’ reserve are known as the NER300. The EU cap-and-trade system, designed to fight climate change, started in 2005 with a three-year trading period, is now in a second phase that ends in 2012 and will enter a third stage from 2013 through 2020.

“While details, including the starting date of the sales, are not fixed yet, it is expected that all NER300 allowances will be sold before the start of the third trading period of the EU emissions-trading system in January 2013,” the European Commission, the bloc’s regulatory arm, said in a statement today in Brussels.

Renewable-Energy Projects

The EU decided in 2008 that revenue from the sale of the allowances would be used to aid carbon-capture and renewable- energy projects. In a related step today, the EU opened a contest for the first portion of the aid from the reserve. The announcement covers 200 million of the CO2 permits and companies have three months to submit bids.

EU carbon allowances for December 2010 traded 0.4 percent up at 14.30 euros a metric ton as of 3:51 p.m. in London, compared with an intra-day high of 14.33 euros. They have gained almost 14 percent this year on signals the region’s economy is recovering from the recession.

The permits to be sold by the EIB will probably be the first allowances for the next trading period brought to the market. Power producers have said they need phase-three permits immediately to hedge their future electricity sales.

As sales are due to start within a month of the allowances being made available in a registry account, the permits probably won’t be brought to the market before the fourth quarter of 2011, according to Tschach Solutions GmbH, the Karlsruhe, Germany-based provider of carbon-market analysis.

‘Fundamentally Bullish’

“The decision is fundamentally bullish for 2011 because I hardly see any technical possibility that those permits will be sold in the first half of next year; the registry is simply not ready yet,” said Tschach Managing Director Ingo Tschach. “Then in 2012 we will see a bigger demand from utilities for hedging.”

According to EU law, the single registry for the emissions-trading system has to be operational at the start of 2012 and work on this is continuing in the Brussels-based commission, Peter Zapfel, head of policy co-ordination in the climate department, told journalists today.

“No further specific target has been set yet,” he said.

European electricity industry association Eurelectric said in April the EU should auction as many as 500 million phase- three permits, including 200 million from the new entrants’ reserve, before the start of the next trading period.

West European utilities including RWE AG and E.ON AG will get no more free permits in the third phase, while east European power plants will have to buy 30 percent of their permits at auctions, with the amount rising to 100 percent in 2020.

Carbon Allowances

The commission will probably start discussions with member states later this year about the timing and volume of early auctions for carbon allowances in the third trading period. Jos Delbeke, director general for climate at the commission, said in April the EU may sell 100 million tons of phase-three allowances in 2012 “to demonstrate the system is working” and alleviate uncertainty about the process.

The planned sales of permits to raise funds for emission abatement projects are higher than expected, said Konrad Hanschmidt, an analyst at Bloomberg New Energy Finance. New Energy Finance had earlier forecast that 100 million of the 300 million allowances would be held back and sold in 2013, Hanschmidt said by telephone.

“While more supply is actually bearish, the commission will be able to adjust the market impact by releasing potentially less forward auctioning volume,” Hanschmidt said. “In any case by using the combination of NER300 selling and forward auction they will be in a good position to ensure a smooth price transition to the third phase.”

Over-the-Counter Transactions

The EIB can sell the allowances through auctions, on an exchange or in over-the-counter transactions, and it will aim to “minimize” any impact on the secondary market, the EU said.

“The EIB will sell the allowances by spreading the volumes as evenly as possible over the selling period,” it said. “The bank will ensure that sale prices do not deviate significantly from the relevant secondary market prices.”

The agreement with the EIB assumes “in principle” that the allowances will be sold for future delivery, not for spot delivery, according to Zapfel.

The EU cap-and-trade program, the world’s largest, imposes CO2 quotas on around 12,000 power plants and factories. The overall supply of allowances over the periods is diminishing, and the EU is moving toward the general auctioning of permits now granted largely for free to fill the CO2 quotas.

The average annual cap in the trading period from 2008 through 2012, agreed before the recession eroded energy demand, is just above 2 billion tons and the ceiling will be 11 percent tighter in 2013-2020 on the basis of installations currently in the system. Including aluminum and chemical makers that join the program in 2013, the limit for that year was set at 2.04 billion tons. A further adjustment is planned for airlines from 2012.

To contact the reporters on this story: Ewa Krukowska in Brussels at ekrukowska@bloomberg.net; Jonathan Stearns in Brussels at jstearns2@bloomberg.net.

To contact the editors responsible for this story: Stephen Voss at sev@bloomberg.net; James Hertling at jhertling@bloomberg.net.