EU Sees ‘Increasing Signs’ Carbon to Drop More Without Glut Fix

The European Union warned member states that carbon prices are likely to decline further without action to curb oversupply in the world’s biggest emissions market, according to an EU document obtained by Bloomberg News.

“There are increasing signs that, absent any decision on backloading, it seems unlikely that the market will be able to absorb the outstanding auction volume at the current price,” the European Commission told member states at a Jan. 23 meeting in Brussels, according to the document, a summary record of the gathering.

The commission, the EU’s regulatory arm, gave a presentation on the latest developments in the bloc’s carbon market during the monthly meeting of national experts in the Climate Change Committee. The next day EU carbon permits sank to a record low after a panel in the European Parliament issued a non-binding opinion that lawmakers should reject a draft proposal by the commission to delay auctions of some permits, a plan known as backloading.

At stake is the fate of the 54 billion-euro ($72.5 billion) EU cap-and-trade system after an excess of allowances caused by an economic crisis drove prices to a record low of 2.81 euros a metric ton, down as much as 91 percent from a record in April 2006. The Parliament’s environment committee is due to vote on Feb. 19 on the first element of the commission’s proposal: a change to the emissions law to enable postponing auctions of some permits.

Greater Proportion

The EU began auctioning a greater proportion of allowances in the 2013-2020 period, known as Phase 3. The commission’s strategy to tackle the glut is to delay 900 million of permits from 2013-2015 and return them to the market in 2019-2020. The proposal has divided governments, industry organizations and members of the Parliament.

EU carbon allowances for delivery in December have declined more than 30 percent so far this year on uncertainty whether the glut fix will be implemented. The European Energy Exchange canceled the sale of 4 million metric tons of permits by Germany last month because bidding didn’t reach the auction’s minimum price.

“The auctions so far have been conducted in a satisfactory manner, but the cancellation of the auction on 18 January 2013 underlines the importance of a decision on the commission’s proposal for backloading the auctioning of allowances,” according to the EU document.

The commission also presented a way forward to compensate the over-auctioning of 2012 allowances for airlines by selling a corresponding lower amount of post-2012 permits, the document showed. The EU announced in November it would freeze auctions of aviation allowances for last year after deciding to seek a delay in implementing emission curbs on flights into and out of the region’s airports.

Aviation Allowances

“The auctioning of Phase 3 aviation allowances - in accordance with the existing legislation - would start as from May,” the commission said in the document.

EU governments are due to continue discussions on the backloading proposal at the next meeting of the Climate Change Committee on Feb. 27, according to the agenda of the gathering.

Other issues to be raised at this month’s meeting include the continuation of talks on the outlook for a second tranche of aid for clean technologies under the so-called NER300 program. The EU already sold 200 million of carbon permits from a special reserve to support renewable-energy projects and the second phase will cover the remaining 100 million allowances.

The commission “indicated the intention to launch the second call soon and pointed to the fact that a revision of the NER300 decision would delay the process,” according to the summary of the Jan. 23 meeting.

To contact the reporter on this story: Ewa Krukowska in Brussels at ekrukowska@bloomberg.net

To contact the editor responsible for this story: Lars Paulsson at lpaulsson@bloomberg.net

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