EU Risks 12 Years of Oversupply in CO2 Market: Report

The European Union’s emissions trading system will be oversupplied for the next 12 years unless policy makers intervene to withhold carbon allowances from the market and tighten climate targets, a study showed.

The region’s emissions-reduction program, also known as the ETS, will have 1.42 billion excess permits to discharge carbon dioxide by 2020 without policy changes, according to the study carried out by the Oko Institut for Greenpeace and WWF. The report, whose publication today coincides with a meeting of EU environment ministers, points to economic slowdown and imports of foreign carbon credits as the main reasons for oversupply.

“Without intervention, the effectiveness of the ETS would suffer from a lack of scarcity until 2024,” said Joris den Blanken, emissions expert at the Greenpeace European unit in Brussels. “This report proves we simply need deeper emission cuts, not just a short-term fix, if we want to keep rewarding green investments in Europe.”

The European Commission, the 27-nation bloc’s regulatory arm, is considering options to improve the world’s biggest cap-and-trade carbon market after the price of allowances slumped to a record low of 5.99 euros ($7.52) earlier this year due to oversupply. EU Climate Commissioner Connie Hedegaard said in April that as a first step to fix the market she planned to propose delaying some auctions of permits in the first years of the next trading period that runs from 2013 to 2020.

‘Negligible Effects’

The permits would be returned to the market at a later stage in the so-called Phase 3 and the total pollution cap would not be changed under the proposal, which the commission signaled would be submitted to member states in the middle of July for consideration and then a vote.

Should the EU set aside 1.4 billion permits in four equal tranches from 2013 to 2016 any reintroduction of the permits to the market before 2020 will have “negligible price effects” and the ETS will remain oversupplied until 2024, according to the Oko Institut report. A “significant and timely” reduction of the oversupply is possible only if the EU combines a set-aside of allowances with tightening the current emission-reduction targets, the study showed.

The ETS’s pollution curbs on more than 12,000 utilities and manufacturers currently lead to a cap in 2020 that will be 21 percent less than 2005 discharges. In the third trading period, when the ETS will expand to include new industries and most permits will be auctioned, the limit will decrease by 1.74 percent annually.

20 Euros

“ The combination of a set-aside, which is held back for a decade or more or is finally retired, and an increase of the linear reduction factor from 1.74 percent to 3.9 percent from 2014 onwards would lift the EUA price by up to 7 euros in 2013 and potentially by more than 20 euros by 2020,” the Oko Institut said in the report.

EU allowances for delivery in December traded up 1.1 percent at 6.76 euros a metric ton as of 12:08 p.m. on the ICE Futures Europe exchange in London. The contract was still 61 percent down compared with a year ago because of oversupply.

The increase of the linear reduction factor in the ETS to 3.9 percent a year would mean tightening Europe’s headline carbon-reduction goal to 30 percent from the current 20 percent by 2020 compared with 1990 levels, according to the report.

EU 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.

Blocked Declaration

Poland, which relies on coal for more than 90 percent of its electricity, twice in the past year blocked a political declaration by EU ministers on climate policies, saying it was concerned it could lead to a legislative proposal on tighter carbon goals.

The future EU emission-reduction path was removed from the agenda of today’s ministerial meeting after Germany, which wanted to have a discussion on the issue, concluded it was impossible to secure unanimous support for a political declaration on the matter, an EU official said last week.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE