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EU Carbon-Permit Set-Aside Requires Change of Law, Poland Says

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April 12 (Bloomberg) -- European Union law doesn’t allow withholding carbon allowances from the market and would need to be changed to enable temporary curbs of supply, according to a senior Polish government official.

An option floated by the European Commission to delay auctions of permits in a simplified procedure, often referred to as a set-aside, would violate the law, said the official, who declined to be identified, citing policy.

The EU is considering tools to tackle the oversupply of emission allowances, which drove carbon prices to a record low earlier this month. Poland, which last month blocked an EU political declaration on climate policies, said earlier this year that a potential set-aside would destroy market features of the European emissions trading system, the world’s largest.

Any decision to temporarily limit the amount of allowances to be sold would contradict the EU law, which requires auctions to be “predictable,” in particular regarding the timing, sequencing and volumes of permits to be made available, the official said.

The commission, the EU institution which has the right to propose regulation, declined to comment. Isaac Valero-Ladron, climate spokesman for the body in Brussels, said earlier this week that the commission was considering different options to address “some problems” in the region’s carbon market.

The Polish position highlights the political difficulty the EU is facing to recalibrate its emissions trading system, known as the ETS, after a recession and debt crisis cut industrial output and reduced demand for carbon permits.

‘Addressing Oversupply’

A set-aside of carbon allowances is “the only possible shorter-term solution to addressing oversupply,” the Geneva-based International Emissions Trading Association said in a briefing note yesterday.

It would be created by amending the EU regulation on carbon-permit auctions in a process known as comitology, where an implementing measure needs qualified majority support from representatives of member states to pass and then is subject to scrutiny by national governments and the European Parliament.

A revision of the emissions law, which includes the predictability principle that Poland is referring to, could take more than two years in a politically contentious step also involving the European Parliament.

EU carbon permits for December rose 1.9 percent to 7.17 euros ($9.45) a metric ton on the ICE Futures Europe exchange in London today. The contract has declined 59 percent in the past year on concern that the ETS will be oversupplied through most of the next trading phase from 2013 to 2020.

Debt Crisis

The emission caps that the EU program imposes on more than 12,000 facilities were set before the debt crisis and economic slump. The ETS will be oversupplied by permits covering around 1.1 billion tons of CO2 by 2012, according to Bloomberg New Energy Finance. This surplus may be transferred into the next trading period.

The Parliament’s industry committee earlier this year voted to enshrine the commission’s right to propose a set-aside of permits in a law on energy efficiency legislation. Member states object to the amendment, opposing a link to emission trading rules to energy efficiency, according to a March 29 document obtained by Bloomberg News.

The two sides started yesterday a series of meetings to iron out differences on the law. Even if the carbon-permits set-aside option is left out in the energy law, the commission still has the right to propose a measure on withholding allowances at any time at its own initiative.

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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