Climate Commissioner Connie Hedegaard said holding back some European Union emission permits starting in 2013 would help produce a carbon price that encourages cleaner-energy technologies.
The European Commission, the bloc’s regulator, will propose setting aside from 500 million to 800 million carbon allowances in the eight-year period through 2020, according to a draft document to be published next week. The reserve would amount to around 5 percent of the greenhouse-gas limits the EU set for energy and manufacturing companies in the next phase of its cap-and-trade program, the world’s largest.
“The emissions-trading system at present doesn’t give sufficient incentive for innovation,” Hedegaard told a committee hearing in the European Parliament in Brussels today. “The commission already suggested last year this could be addressed by setting aside a number of allowances.”
The worst recession since World War II is hampering the EU’s plan to use its cap-and-trade program, valued at $110 billion last year, to cut emissions linked to climate change. Lower-than-projected demand for permits created a surplus that threatens to depress prices and discourage investment in low-carbon energy for the rest of the decade, according to the EU.
Benchmark allowances for December 2011 rose 0.7 percent to 15.54 euros ($21.45) a ton at 5 p.m. on the ICE Futures Europe exchange in London. That compares with the record 34.20 euros set in April 2006.
The set-aside provision in the EU draft corresponds to the number of unused permits that may be left over in 2012, according to commission’s estimates. That is the last year of what the EU defines as the second phase of the program that started in 2008. Under the bloc’s rules, those allowances can be carried into the third phase, which begins in 2013.
The EU could eliminate excess supply over time by withholding permits from auctions starting in 2013, Hedegaard said. The bloc, which has given away the majority of allowances since it started the program, will require most emitters to purchase their pollution rights in the next phase.
“This would not affect the number of allowances given for free to trade-exposed energy-intensive sectors,” Hedegaard said. “It would send stronger prices signal and increase auctioning revenues for member states that can be re-invested in the economy.”
The EU started its cap-and-trade system six years ago to put a price on carbon, penalizing polluters and encouraging cleaner energy. The program, known as the ETS, imposes limits on more than 11,000 utilities and manufacturing companies and sets a 2020 cap on discharges that would be 21 percent below 2005 levels. One EU permit carries the right to emit 1 metric ton of carbon dioxide.
The commission’s plans to withhold some permits in the next phase of the carbon system have already sparked criticism from energy-intensive industries, including the association of the European steel producers Eurofer. The group said last week the set-aside would effectively mean tighter emission caps and higher costs for companies in the EU emissions program.
The ETS is the EU main tool to meet its internal target of cutting emissions by 20 percent in 2020 compared with 1990 levels from 80 to 95 percent in 2050. The so-called 2050 carbon roadmap to be published next week will show that the EU can cut greenhouse gases by 25 percent in 2020 if it steps up efforts to boost energy efficiency, Hedegaard said.
“If we keep other plans and increase the focus on energy efficiency that would add an extra five percent to emissions reductions,” she told the committee. “ If we only address energy efficiency without addressing the set-aside, then we would depress carbon prices and industry knows that would be the opposite of what we need.”