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EU Carbon Market Has Become ‘Residual’ in Power, IHS CERA Says

The European Union carbon market, the world’s biggest by traded volume, has become “residual” in power generation because of national renewable energy policies in the bloc, said IHS CERA, the energy adviser.

“The emissions trading system has become a residual market for carbon abatement in the power sector,” Fabien Roques, director at the unit of Englewood, Colorado-based IHS Inc. (IHS), said yesterday in a CDC Climat publication. “Policies in support of renewables or nuclear have been the prime drivers of power sector investments over the past decade in Europe.”

Emissions standards for pollutants will prompt retirement of more than 30 gigawatts of coal and oil power capacity by 2015, cutting demand for emission permits, he said. That capacity is enough to supply about 60 million EU homes. The European Commission, the Brussels regulator, said March 6 it may create a temporary set-aside of carbon permits to deal with an oversupply by amending its regulations on auctions, assuming nations in the bloc decide to go down that route.

The set-aside plan may be an “ad-hoc fix” that increases the chance of intervention when carbon prices rise and lawmakers should instead install a permanent solution that allows the market’s supply to adjust on a more predictable basis, Roques said.

“Member states could for instance be required to estimate the amount of additional or avoided carbon emissions in an impact assessment of any new environmental policy that overlaps with the emissions trading system,” he said.

Those policies may include mandatory nuclear closures or a change in support levels for renewables, Roques said.

“The ETS cap could then be adjusted accordingly so that the supply-demand balance and therefore price level would not modified by these broader policy changes,” Roques said. The EU could also appoint an independent authority to manage supply, he said.

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