EU’s Plans to Curb CO2 Supply Is Legitimate, Lawyer Says

European Union law allows regulators to delay sales of some permits in the bloc’s carbon market as of next year, equipping them with a tool to curb oversupply, according to a leading emissions lawyer.

In any proposal to postpone carbon auctions the European Commission, the bloc’s regulatory arm, would need to define the quantity of allowances to be sold at a later date, the distribution per member state and possibly a new timeline for introducing them to the market, according to Mihalis Kritikos, an expert in the EU law at White & Case legal practice in Brussels. The commission has said it’s working on a draft measure to delay auctions after carbon prices slumped to a record low earlier this year.

“There is nothing in the Emissions Trading System directive that prevents the implementation of a measure to set aside allowances by postponing the auctioning of some of the allowances,” Kritikos said by e-mail today.

Comments by Kritikos, who worked as a legal adviser to the commission before joining White & Case and has taught EU law courses at the London School of Economics, contradict the analysis of the Polish government, according to which the European legislation doesn’t allow withholding carbon permits from the market.

The commission is planning to present to member states “in the not-too-distant future” a review of the carbon-permit auctioning regulation to postpone some sales of allowances in the early phase of the next trading period that runs from 2013 to 2020, Climate Commissioner Connie Hedegaard said earlier this month. The draft measure could be submitted to EU governments by the middle of July, with a view to a vote in September, according to an EU official, who declined to be named.

Short-Term Fix

A delay in the auctioning rate would be a short-term fix to the EU emissions trading system, also known as the ETS, and would amount to a temporary withholding of allowances, without changing the 2013-2020 pollution cap. Environment lobbies and some members of the European Parliament have also urged the EU to create a permanent set-aside of allowances that would be subsequently canceled at the end of the next trading period.

“Setting aside the allowances is justified either as a way of tightening the cap in support of the transition to higher greenhouse-gas reduction levels, or to adjust the cap to the consequences of the implementation of renewables and energy efficiency targets or simply to safeguard the efficiency of the system, certainty and predictability,” Kritikos said.

Headline Goal

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 emission caps that the EU emissions trading system imposes on more than 12,000 facilities owned by manufacturers and utilities were set before the debt crisis and economic slump. The program 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.

EU permits for December have lost 61 percent in the past year on concern that the excess of allowances will be weighing on the market for most of the next trading period, also known as Phase 3. The contract fell 1.2 percent to 6.72 euros a metric ton as of 9:51 a.m. on London’s ICE Futures Europe exchange.

Temporary Delay

The EU is moving toward auctioning allowances in the third phase of the ETS after giving most of them for free in the first two trading periods since 2005 to companies including Germany’s biggest steelmaker ThyssenKrupp AG and Italy’s biggest utility Enel SpA. 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.

While a temporary delay to some carbon sales could be done by revising the EU auctioning regulation in the so-called comitology procedure, any permanent cancellation of permits would require a revision of the EU ETS directive, which lays the foundation for carbon trading in the region.

Both changing the regulation and the directive require qualified majority support from member states, yet amending the ETS law to change the number of permits in the cap-and-trade system could take more than a year in a politically contentious step also involving the European Parliament.

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

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