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EU’s Hedegaard Says CO2 Auctions Review Is Short-Term Fix

The European Union’s planned measure to delay some carbon auctions is a short-term tool to tackle oversupply and will be followed by talks on further steps to bolster the bloc’s climate policies, the EU climate chief said.

The European Commission is planning to present to member states “in the not-too-distant future” a review of the EU carbon-permit auctioning regulation to postpone some sales of allowances from 2013, Climate Commissioner Connie Hedegaard said. That could help boost prices in the European emissions market after they sank to a record last month.

“That’s basically backloading; it’s a question of how many allowances will come to the market and when,” Hedegaard said today in a Brussels interview. “Then there’s another discussion, when many CEOs from huge European corporations start saying that we also need to take away more permanently some of the allowances from the market. That discussion will come later.”

European governments and the commission, the EU regulatory arm, have come under pressure from companies including Germany’s largest utility, EON AG, and the region’s biggest oil company, Royal Dutch Shell Plc, to improve the bloc’s carbon market after a recession cut industrial output and pollution prices slumped to a record this year on oversupply.

Environment lobbies and some members of the European Parliament have also urged the EU to fix its carbon cap-and-trade program by creating a set-aside of allowances that would be subsequently canceled at the end of the next trading period in 2020.

Permanent Cancellations

“That’s the reflection we have to go through when we talk about more long-term measures,” Hedegaard said. “That was also what the discussions at the informal environment council in April centered around.”

Any permanent cancellation of permits would require revision of the EU directive on carbon trading. Under the European law, the bloc’s headline goal is to reduce greenhouse gases by 20 percent in 2020 compared with 1990 levels. The 2020 cap for utilities and manufacturers in the emissions trading system, the key tool of EU climate policy, will be 21 percent below 2005 discharges.

The number of allowances in the system will also become the subject of talks when the EU discusses longer-term greenhouse-gas targets, according to Hedegaard. The commission said in a strategy paper published in 2011 that the most cost-efficient scenario for Europe would be to cut emissions by 40 percent in 2030 and 60 percent in 2040 compared with 1990 levels.

Signal to Investors

“If you said now we’ve the target for 2030 then you’d have a discussion about how many allowances there should be in the next decade,” Hedegaard said. “That’s of course a very clear way of sending signals to investors.”

The emission caps that the EU emissions trading system imposes on more than 12,000 facilities were set before the debt crisis and economic slump. The program, also known as the EU 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 Phase 3.

The EU is moving toward auctioning allowances in the third phase of the ETS after giving most of them to companies for free in the first two trading periods since 2005. Under the current rules, relatively more allowances will be sold to the market in the early part of the next phase and relatively fewer in the later years, according to Hedegaard.

‘Over-Flooded Market’

“That is not the wisest thing to do, I believe, when you already have an over-flooded market,” she said, adding she would aim for a decision by member states on the planned proposal to revise the auctioning rules by the end of this year.

EU permits for December have lost 61 percent in the past year on concern that the cap-and-trade program will be oversupplied for most of the next trading period from 2013 to 2020. The contract was unchanged at 6.79 euros ($8.81) a metric ton as of 2:51 p.m. on London’s ICE Futures Europe exchange.

While the ETS “has been doing its job” of delivering emission-reductions, the bankability of allowances and resulting oversupply may lead to a situation where the price will fail to recover even after the economic slowdown ends, Hedegaard said.

“That’s why it makes sense to address the low price,” she said. “If it was only a temporary thing, as long as the crisis is there, then there wouldn’t be a need to look at this.”

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