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U.K. Proposes Canceling EU CO2 Allowances to Raise Prices

U.K. Energy Secretary Ed Davey said he’s pushing for the European Union to cancel some emissions trading allowances to boost the carbon price by mopping up an excess of the permits used to reduce pollution.

The EU is debating “backloading,” or delaying some auctions of carbon permits to industry, in order to lift prices that this year have fallen to a record, reducing the incentive for power plants and factories to cut greenhouse gases. The 27- nation bloc should go further, Davey said today at the start of an EU climate campaign in London.

“In order to deliver certainty to markets and businesses, we need to go further than backloading,” Davey said. “I am going to use the current negotiations on the EU ETS to argue for permanent cancellation of EU ETS allowances, in order to drive up that carbon price.”

The EU is trying to retain its position as leading the global fight against climate change as it confronts a three- year-old debt crisis that’s led to bailouts for Greece, Portugal and Ireland and emergency funds for banks in Spain.

“For some people, fixing the climate is not a priority now that we are all struggling with an economic crisis and record unemployment,” EU Climate Commissioner Connie Hedegaard said in a speech in London to start the bloc’s ‘A World You Like With a Climate You Like’ campaign. “Building a low-carbon economy is not a luxury. It’s an opportunity to boost economic growth and create jobs.”

‘Big Mistake’

Hedegaard said continuing on a “business as usual” trajectory would be a “big, dangerous mistake.” The environment, health care and communications have been identified by the European Commission as three areas that can generate a “substantial amount of new jobs” by 2020, at a time when EU unemployment is more than 25 million, she said.

Davey said that the U.K. remains committed to raising the EU emissions reduction target to 30 percent below 1990 levels by 2020 from the present 20 percent. He said he’s working alongside Germany with Poland, the main opponent of the tougher goal, to see if a deal can be reached to “deliver greater ambition in 2020.”

“I believe Poland is looking for a way out of their isolation on the environment in Europe,” Davey said. “I believe we can find a way forward even during the next six months.”

Canceling Permits

Canceling 1.4 billion carbon permits would put those companies that participate in the EU market on track to reduce their pollution by 30 percent by 2020, Davey said. Canceling 1.8 billion permits would eliminate all the excess certificates that have depressed prices, he said.

Davey’s comments are encouraging, according to the climate lobby group Sandbag, which said as many as 2.2 billion tons of permits need to be taken from the system.

“The commission’s current proposal to ‘backload’ allowances from the start of the next trading period will only defer the supply crisis facing the scheme unless it is a prelude to more permanent reforms,” Damien Morris, a policy adviser to the group, said in an e-mail.

The Emissions Trading System is the cornerstone of EU climate policy, imposing curbs on discharges at more than 11,000 carbon-emitting factories and power plants. Carbon permits touched a record low of 5.99 euros ($7.77) in April as supply exceeded demand.

To contact the reporter on this story: Alex Morales in London at amorales2@bloomberg.net

To contact the editor responsible for this story: Reed Landberg at landberg@bloomberg.net

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