Carbon Plan Hurts EU Credibility as Regulator, Traders Say

A plan by the European Commission to prevent emitters from using some Emission Reduction Units issued after the end of this year damages the regulator’s credibility, said a lobby group representing traders.

The proposal does not follow due process and the commission should have proposed a change to the emissions trading system law instead of the carbon registry regulation, Jeff Swartz, Geneva-based international policy director at the International Emissions Trading Association, said today.

“It has an impact on the commission itself and its credibility as a regulator,” Swartz said by phone. “The market hates major changes being dropped on it from on high.”

Emission Reduction Units for December dropped as much as 16 percent to a record 77 euro cents ($1.01) a metric ton today on the ICE Futures Europe exchange in London, after plunging 27 percent on Oct. 19. They slumped after the regulator proposed the ban on certain credits issued from next year by countries, potentially including Russia, that fail to adopt new emission-cutting targets.

The commission, the EU’s regulatory arm, proposed draft rules for the use of United Nations-sponsored ERU offsets as of 2013 in a modified draft amendment to the bloc’s carbon registry regulation at a meeting of officials from national governments on Oct. 17, according to two people with knowledge of the matter, who declined to be identified because the gathering was private. The EU doesn’t comment on draft regulations.

ERUs are generated under the rules of the Joint Implementation mechanism of the Kyoto Protocol, known as JI.

“In line with the principle of the Kyoto Protocol, the continuation of JI after 2012 is subject to new quantified emission targets being in place,” the commission said in an EU document published on its website last year.

Predictability Requested

Traders were assuming they could use ERUs for EU compliance at least for the 2012 year, which has a compliance window through April 2013, Swartz said. Investors have entered into contracts that extend many months into the future.

IETA, whose members include RWE AG, Royal Dutch Shell Plc and Goldman Sachs Group Inc., says any policy changes should include a “predictable time line,” he said.

“There has been no notice to the EU emissions trading system of this change,” Swartz said. “The way they are doing this isn’t healthy. Not only does it offend investors, but it offends member states as well.”

EU member governments usually have a role explaining EU rules to businesses, he said.

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