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EU Said to Consider Linking Carbon-Permit Supply to Growth

The European Union may propose linking the supply of carbon permits with economic performance as a long-term option for the world’s biggest emissions market, a person with knowledge of the matter said.

The European Commission, the EU’s regulatory arm, may propose introducing a so-called adjustment mechanism to react to macroeconomic developments in a report on the carbon market due to be published next month, said the person, who declined to be identified because the information is private. The EU currently doesn’t have any tools to adapt emission caps once established.

European permits for delivery in December advanced as much as 1.1 percent to 8.35 euros ($10.53) a metric ton, and traded at 8.30 euros on the ICE Futures Europe exchange as of 8:52 a.m. in London. The EU emissions trading system, known as the EU ETS, imposes pollution limits on about 12,000 manufacturing companies and utilities in the region.

“Linking EU ETS supply with economic performance of the EU would be a benign idea and indeed a bullish signal,” said Milan Hudak, a Prague-based carbon analyst at Virtuse Energy s.r.o.

Linking the supply of EU emission allowances to growth may help avoid creating an excess of permits in the region, which will be oversupplied by about 1.1 billion metric tons of CO2 by the end of next year, or 10 percent of all permits handed out in the five years through 2012, according to Bloomberg New Energy Finance estimates.

$148 Billion

The report will summarize the functioning of the EU carbon cap-and-trade program to date and sketch out ways of improving the market, valued at $148 billion last year, according to the World Bank. It will be presented to EU national governments for consideration, the person said.

It will also include an option of the so-called permanent set-aside, or withholding some excess permits from the market and canceling them at the end of the next trading period, according to the person. Another scenario for the consideration by national governments will be setting a 2030 emission-reduction goal for the EU as soon as possible, the person said.

It was not immediately clear when any of the options could become a law. The commission’s report won’t constitute a legislative proposal and the potential introduction of a flexibility mechanism would need support from national governments to change the existing rules.

“The EU has talked a lot about several lofty ideas on how to improve the EU ETS but as we know, realization and implementation of such promises is hard to achieve,” Virtuse Energy’s Hudak said.

The EU carbon market, started in 2005, is now in its second trading period and will enter the so-called third phase next year. The fourth stage is set to start in 2021.

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