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EU Said to Favor 1.2 Billion CO2 Permit Sale Delay in Report

The European Union may favor delaying sales of as many as 1.2 billion carbon allowances from 2013 in a planned report on the outlook for its emissions-trading program, two people with knowledge of the matter said.

The European Commission, the 27-nation EU’s regulatory arm, sketched out three scenarios to temporarily curb the oversupply in the cap-and-trade system in the draft report, the people said, declining to be identified because talks on the document are confidential. The two other options are withholding 400 million or 900 million permits in the three years through 2015, they said.

The report on the functioning and potential tools to strengthen the emissions market, after prices fell to a record low in April, was drafted by the commission’s climate department and needs to be signed off by EU commissioners heading directorates from industry to energy.

The number of allowances that regulators will propose to be delayed based on the findings of the report hasn’t been determined yet and will also need approval from the college of EU commissioners, the people said.

EU Climate Commissioner Connie Hedegaard said this week the report will be published before August and accompanied by the formal regulatory proposal, based on the findings of the report, to delay sales of some permits in the next phase of the emissions program. The document will be made public when it’s sent to member states for consideration.

1.1 Billion

The bloc’s market will be oversupplied with about 1.1 billion permits by the end of the current 2008-2012 trading period, according to Bloomberg New Energy Finance. The surplus may be carried over to the next stage in the emissions trading system, or the ETS, that runs from 2013 to 2020 and is often referred to as Phase 3.

The allowances to be withheld under the EU’s planned proposal to review the auctioning regulation would be returned to the market in the second half of Phase 3, the commission has said. The commission described the option of holding back 1.2 billion permits as its preferred option in the draft report, the people said.

The report on the carbon market, which has been brought forward by a year to float various options to improve the world’s biggest emissions market, will also include a scenario to permanently set aside a number of carbon allowances, Hedegaard said in a statement yesterday.

Politically Contentious

While delaying the supply of allowances can be done through an amendment to rules on carbon auctions through the so-called comitology process that takes about five months, any reduction in the total number of permits in the system would require changing EU legislation, a politically contentious step that may take as long as two years.

The draft report shows that the EU will also need to enact other long-term measures to tackle structural imbalances in the ETS, according to the people familiar with the matter.

Options include tightening the existing headline greenhouse-gas reduction target to 30 percent in 2020 from the current 20 percent, changing the 1.74 percent annual linear emission-reduction factor in the ETS and including more industries, such as transport, in the cap-and-trade program, the people said.

EU permits for December rose as much as 5.5 percent to 7.31 euros ($9.24) a metric ton in the ICE Futures Europe exchange in London. They were at 7.25 euros at 4:32 p.m.

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