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EU Carbon Surges on Parliament Support for Permit Set-Aside

EU Carbon Surges 32% on Parliament Vote to Set Aside Permits
Carbon allowances, which earlier this month slumped to a four-year low, today pared their loss to 37 percent this year on speculation that legislators will curb oversupply of permits after the energy efficiency comes into force and reduces demand for emission rights. Photographer: Hannelore Foerster/Bloomberg

European Union carbon prices jumped after the EU Parliament environment committee backed a draft rule requiring the bloc’s executive to propose a temporary cut in permit supply in the next phase of its carbon market.

Carbon allowances rose as much as 32 percent on speculation that an amendment to an energy efficiency law voted today raised the likelihood of the EU curbing oversupply and supporting prices in its emissions trading system. Concern that the new energy-savings regulations will further cut demand for pollution rights at a time of economic slowdown helped knock carbon prices to a four-year low last week.

Analysts at Bloomberg New Energy Finance predict that the EU market will be oversupplied by 997 million metric tons, or 9.6 percent, from 2008 to 2012. This surplus may be transferred into the second phase from 2013 to 2020, in which New Energy Finance predicts a net shortfall of 749 million tons. Rising carbon prices will add to energy costs.

“This price jump is probably a slight over-reaction from a market starved of bullish news, as this committee vote is not as material as the jump would suggest,” said Konrad Hanschmidt, an analyst at Bloomberg New Energy Finance in London.

EU permits for December 2012 delivery rose to as high as 9.75 euros and were at 9.05 euros as of 1:40 p.m. on the ICE Futures Europe exchange in London. The region’s emissions trading system, known as the ETS, is the world’s largest and was valued at $120 billion last year.

‘Significant Amount’

The Parliament’s committee supported a change to the energy-savings directive that calls on the European Commission by the end of next year to propose fixes to its emissions auctioning regulation in order to “withhold a significant amount of allowances.”

The committee’s suggestion would have to be backed by a majority of deputies in the parliament as well as member states to become a law. A subsequent proposal by the commission to set aside permits would require consent from national governments in a separate regulatory process.

“The compromise amendment was adopted almost unanimously,” Peter Liese, a deputy from the European People’s Party in the parliament, told a news conference in Brussels today. “We approved a careful intervention in the ETS.”

Under the same amendment, the committee voted to add in a non-binding part of the directive a clause that would require the commission to set the number of permits to be withheld at such a level that wouldn’t push carbon prices above 30 euros.

‘Change in Policy’

“It’s an amendment of change in the current policy,” Liese said. “If you decide that a price is too low, you’ve also got to decide when a price is too high.”

The commission first came up in 2010 with the idea of setting aside allowances in the next phase of the emissions program starting in 2013 and also included a reference to such a tool in a March 2011 policy paper, known as the low-carbon 2050 road map.

It has suggested that a set-aside could be gradually created from the pool of permits to be sold to companies by countries starting in 2013. This would require amending the auctioning regulation by the so-called comitology procedure, under which a measure requires backing from representatives of member states in the Climate Change Committee and then is subject to a three-month scrutiny period by the parliament and national governments.

Revision of Directive

Any move to permanently cancel permits after 2020 would require a revision of the directive, which requires approval by the European Parliament and the council of ministers.

Member states remain divided on whether to raise the stringency of the EU’s climate policies. While western European countries have voiced support for tighter pollution caps on companies, eastern nations have in previous years tended to favor a more cautious approach.

The emissions trading system is the cornerstone of the EU policy to cut greenhouse gases blamed for climate change. It imposes pollution limits on more than 11,000 utilities and manufacturers, leading to a cap in 2020 that will be 21 percent less than 2005 discharges.

Another amendment, setting the number of permits to be set aside at 1.4 billion metric tons, passed by “a very narrow margin” and will “definitely not survive” in the committee on industry, which also discusses the directive, and in the plenary, Liese said.

‘Serious Obstacles’

In a separate vote, the deputies backed a change in the so-called linear reduction factor, by which the cap on polluters in the EU emission trading system decreases annually. The factor should be raised to 2.25 percent as of 2014 from the current 1.74 percent, according to the amendment.

“While today is good news, there are still some very serious obstacles to be crossed and the exact level of the set-aside and any change to the cap still needs to be clarified,” Trevor Sikorski, an analyst at Barclays Capital, said in a research note. “We would caution against over optimism, but this does feel like a seasonal treat from the EU to those in the carbon market.”

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