Carbon Market’s Fate in Europe Hangs on EU Vote to Fix Surplus

European Union lawmakers may determine the fate of the world’s biggest carbon market when they vote today on a proposal to cut a record surplus of emission permits that has pushed prices to an all-time low.

The European Parliament’s environment committee is considering an amendment to EU emissions trading law that will enable sales of some carbon allowances to be delayed until the end of the decade, a process known as backloading. The panel’s non-binding opinion, due after 9 a.m. in Brussels, will serve as a recommendation for the whole parliament in a later vote.

At stake is the EU’s 54 billion euro ($72 billion) cap-and- trade system, which imposes emission limits on about 12,000 companies from EON SE, Germany’s largest utility, to steelmaker ArcelorMittal. The aim of backloading is to help support the price of carbon permits, which slumped to 2.81 euros a metric ton last month from more than 10 euros a year ago as Europe’s sputtering economy damped demand.

“If it’s ‘no’ for backloading, then the proposal could be politically dead,” Matthew Cowie, an analyst at Bloomberg New Energy Finance in London, said by e-mail. “If it passes with a clear majority, it could bode well for further legislative stages and prices may briefly rise to above 6 euros a ton.”

In today’s vote, the environment committee will decide on a law change that makes explicit the European Commission’s right to change the schedule of carbon auctions. If approved, the commission’s proposal still has to be signed off by the whole EU assembly in a vote tentatively scheduled for April, and then the EU’s member states.

Uncertain Outcome

The change would clear the way for EU nations to decide on the commission’s strategy to remove 900 million tons of carbon permits from auctions over the next three years. Those allowances would be returned to the market in 2019-2020.

The supply glut may exceed 1.5 billion tons by the end of 2013, Jos Debelke, the commission’s director general for climate, said Feb. 6. The surplus may swell to about 2 billion tons by 2020, he said.

“There are further legislative steps to be made and uncertainty over their outcome won’t disappear right away,” said Paolo Coghe, a Paris-based power, coal and carbon analyst at Societe Generale SA, who expects the environment panel to back the proposal. “A ‘no’ vote will probably spell the end for backloading” and the EU’s emissions trading system, he said.

The EU introduced its carbon system in 2005 to help meet the emission-reduction targets under the 1997 Kyoto Protocol. It issues allowances to factories and utilities, which must surrender enough permits to cover their emissions or face fines.

‘Positively Optimistic’

Members of the environment committee have put forward a total of 42 amendments to the commission’s one-sentence proposal, ranging from outright objections to measures that would further strengthen the emissions market.

Matthias Groote, chairman of the committee, offered compromise amendments to the draft measure on Feb. 6 in a bid to win support for its approval. Under his proposals, the auction schedule can be changed one time in the 2013 to 2020 period, and only if it doesn’t hurt the global competitiveness of European companies.

“I’m positively optimistic,” Groote, a German Socialist who oversees the proposal in Parliament, said in a Feb. 7 interview.

‘No Tragedy’

The commission’s proposal won’t solve the oversupply problem because it reintroduces the permits at a later date, said Georg Zachmann, a researcher at Bruegel, the Brussels-based economic think tank.

“It will be no tragedy if backloading doesn’t happen,” Zachmann said in a Feb. 15 phone interview. “The proposal would mean political intervention in the market and could destroy long-term credibility of the system.”

EU carbon allowances for delivery in December were down 3.9 percent at 4.92 euros a ton at 7:50 a.m. on London’s ICE Futures Europe exchange, extending yesterday’s decline of 1.3 percent. Still, the contracts have almost doubled from their Jan. 24 low.

EU Climate Commissioner Connie Hedegaard, the architect of the plan to bolster carbon prices, urged members of the environment committee to back the proposal.

“I’m confident that the European Parliament will act responsibly and support backloading,” she said by e-mail.

To contact the reporters 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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