EU Carbon Needs Set-Aside, Auction Reserve Price, Cyprus Says

Europe should consider improving its carbon market by curbing an oversupply of permits, imposing a reserve price at auctions and setting 2030 emission-cutting goals, said Cyprus’s Environment Minister Sofocles Aletraris.

Policy-makers in the 27-nation European Union are considering options to strengthen the world’s biggest emissions-trading program after the price of allowances slumped to a record on April 4 amid a recession and debt crises in the region. Action to reinforce the cap-and-trade plan is justified as the situation serves “neither the economic nor the environmental interests of Europe,” Aletraris said.

“Cyprus believes that an appropriate response would be the adoption of a policy consisting of a triad of mutually reinforcing measures addressing three distinct needs,” Aletraris, whose country takes over the EU’s rotating presidency in July, said in an e-mailed response to Bloomberg questions.

The emission caps that the European emissions trading system, also known as the EU ETS, imposes on more than 12,000 facilities owned by manufacturers and utilities were set before the economic slump, which curbed industrial output.

The program will be oversupplied by permits covering around 1.1 billion metric tons of CO2 discharges by 2012, an amount equal to about half of the annual emissions limit in the current five-year trading period of the ETS that started in 2008, according to Bloomberg New Energy Finance. This surplus may be transferred into the next stage that runs from 2013 to 2020 and is referred to as Phase 3.

‘Prudent and Wise’

The ETS, started in 2005, should be “maintained and safeguarded at all costs,” and its “prudent and wise implementation and improvement” can enhance European prospects for economic stabilization, investment and recovery, Aletraris said in his response, dated June 8.

“Concerns about the ETS are not only about the price or quantity of allowances, but also about the credibility of, and the expectations for the prices of future emissions,” he said. “Addressing these issues requires remedies that are strategic as well as tactical, complementary and not piecemeal.”

To tackle the oversupply the EU should start working on setting aside a number of allowances “to restore future price and auction revenues to meaningful and attractive levels,” according to Aletraris. The move would “build up confidence that the European policy will provide market signals that are consistent with science, as well as international and strategic processes,” he said.

Postponing Auctions

The European Commission, the EU’s regulatory arm, is planning to propose next month a measure to postpone auctions of some allowances from the first years of Phase 3 to a later stage in that period. It also signaled that a permanent set-aside, which would amount to canceling a number of permits and tightening the ETS carbon caps, could be considered at a later date.

The second element of the EU policy to strengthen the region’s carbon market could be “negotiating a rising reserve price on future ETS auctions,” to limit the risks of further declines in prices for investors and stabilize minimum auction revenue expectations, according to Aletraris.

“Such action would probably also reduce tensions between the ETS and complementary measures, and rule out the prospect of ongoing interventions through further set-asides,” he said. Any reduction in the number of allowances in the system or imposing a reserve price would require a revision of the EU law on emissions trading in a politically contentious process that may take as long as two years. Member states remain divided over the need to strengthen EU climate policies.

Polish Veto

Europe should also start negotiations on its carbon-reduction goals for 2030, the Cypriot minister said. The bloc has a binding target to cut overall emissions by 20 percent in 2020 compared with 1990 levels and a political goal to reduce greenhouse gas discharges by at least 80 percent by 2050.

The cheapest way for the EU to reach its 2050 aim is to cut emissions by 40 percent in 2030 and 60 percent in 2040, the commission said last year in a strategy paper known as the Low-Carbon Roadmap. While most EU nations support the strategy, Poland, which relies on coal for more than 90 percent of its electricity, vetoed a political statement by environment ministers on the carbon-cut pathway twice in the past year.

Strategy Paper

Later this month energy ministers are set to discuss another strategy paper by the commission, the so-called Energy Roadmap, which shows that the EU needs as much as 2.2 trillion euros ($2.8 trillion) in power grids alone between 2011 and 2050 as it transforms its economy into a low-carbon one. It also needs hundreds of billions of euros in industrial energy equipment, heating and cooling systems, smart meters and devices for exploiting local renewable energy sources, according to the paper.

Such investment most probably won’t materialize if carbon price remains “well below 10 euros a metric ton for the next several years, instead of the 25 euros to 40 euros projected” when the EU adopted rules for the third phase of its emissions trading system, Aletraris said.

EU carbon permits for delivery in December traded at 6.73 euros on the ICE Futures Europe exchange as of 11:06 a.m. in London. The contract, which dropped to a record low of 5.99 euros in April, has lost 61 percent in the past year.

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