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EU May Propose CO2 Set-Aside in Auction Rules, Zapfel Says

The European Commission may create a temporary set-aside of carbon permits through amending its regulations on auctioning allowances, assuming nations in the bloc decide to go down that route, an official said.

The commission is considering ways in which it can reduce the surplus of supply that depressed carbon permits to a record of 6.38 euros ($8.41) a metric ton on Jan. 4. Members of the European Parliament’s industry committee last week backed a set-aside of permits in discussions over an energy efficiency law.

“Temporary setting aside could be done by an amendment of the emissions trading system auctioning regulation, provided a political decision is taken to do so,” Peter Zapfel, emissions-trading coordinator at the EU commission, said at the Argus emissions conference in Amsterdam.

The surplus of permits in the second phase of the ETS, which ends in 2012, will be transferred, or “banked” into the third phase starting in 2013, which may prolong the market’s oversupply, Zapfel said. The third phase runs through 2020.

“Banked phase-two allowances add to the supply of allowances in phase three from auctions and free allocation and are expected to impact the price signal for a number of years,” he said. “The recession may therefore have a long-lasting effect and could give rise to false investment signals or lock in of carbon-intensive infrastructure.”

The commission is not seeking the authority to intervene in the bloc’s carbon market, Zapfel said.

Market Intervention

“The commission does not seek discretionary powers to intervene in the carbon market,” he said. “Nor does it support any form of direct price intervention or targets like a minimum price. An effective carbon market needs regulatory stability and a rule-bound process with lead-time for market actors to adjust.”

Carbon permits may rise by more than 50 percent to 14 euros by the end of next year, assuming EU regulators propose to set aside 400 million tons of allowances in the three years through 2015, said Bloomberg New Energy Finance. Carbon for December next year fell 4.6 percent today to 9.14 euros on the ICE Futures Europe exchange in London as of 2:44 p.m.

“Installing a set-aside would reduce the chance of a price crash in 2013, when full auctioning starts,” said Matthew Cowie, an analyst in London for New Energy Finance. “It will avoid step changes in the balance between supply and demand in the traded market,” he said March 2 in a phone interview.

Ultimately, the set-aside won’t correct the impact of the recession, Cowie said.

‘Bit Awkward’

“It’s a bit awkward having the set-aside in the energy efficiency directive,” Cowie said. “If the set-aside really was about energy efficiency, it should remove supply later in the decade, when that proposed law starts to cut emissions. You would do it the opposite way around.”

The EU’s justification for having a temporary set-aside of allowances does not sit well with its proposals to boost energy efficiency, a Barclays Plc analyst also said.

“All of the impact from the Energy Efficiency Directive comes after 2015,” Trevor Sikorski, an analyst at Barclays Capital, said in an interview at the conference.

If the energy efficiency directive “is the pure logic,” a set-aside is inconsistent with what the directive is trying to do, he said. “The set-aside is very much a second-best policy. It’s not what you would choose to do.” Tightening the EU caps would be better policy, Sikorski said.

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