July 3 (Bloomberg) -- The European Parliament votes today on a rescue plan intended to bolster emission-permit prices in the world’s biggest carbon market after they tumbled to an all-time low.
The European Union assembly’s environment committee last month endorsed a watered-down version of a proposal advanced by the European Commission, the EU’s regulatory arm. That plan to allow delaying the sale of some carbon permits in an effort to support prices was blocked by the full parliament in April, triggering a 45 percent drop in carbon prices. Lawmakers will vote on the amended bill after 11:30 a.m. in Strasbourg, France.
“I’m confident this time we will have a majority in favor,” Matthias Groote, a German lawmaker from the Socialists and Democrats group who oversees the proposal in parliament, said in an interview. “It’s an innovative approach and the first step to support the transition to a low-carbon economy.”
Emission permits in the EU’s $72 billion cap-and-trade program have lost more than 70 percent in the last four years. The euro area’s record-long recession has reduced demand for pollution rights, worsening a glut that swelled to about 2 billion tons in 2012. That’s almost equal to the EU’s annual limit that the system imposes on some 12,000 power plants and factories. The caps were set before the economic slowdown.
EU carbon allowances for delivery in December dropped 1.6 percent to 4.22 euros a metric ton on the ICE Futures Europe exchange as of 8:06 a.m. in London. The contract slumped to a record low of 2.46 euros on April 17, a day after the Parliament blocked the emergency fix in its first plenary vote.
The rescue plan, known as backloading, has divided policy makers and industry. Opponents of the fix, ranging from Poland to steelmaker ArcelorMittal, say it pushes up energy costs during an economic slump. The EU commission and companies including Royal Dutch Shell Plc say intervention is needed to bolster prices that are too low to stimulate investment in clean technology.
“Signs are hopeful about the vote, but no one is very confident yet,” said Jesse Scott, head of the environment policy unit at power industry association Eurelectric. “The key consideration for members of parliament who voted no in April is whether they really want to risk the consequence of another no, which would be the collapse of the ETS carbon market.”
Under the compromise, intervention would be limited to a one-time move, and the postponed permits would start to be returned to the market one year after they are set aside. The deal also includes a provision to earmark 600 million permits for a fund to develop clean technologies. The commission originally proposed delaying 900 million allowances in the three years through 2015 and reintroducing them in 2019-2020.
The restrictions backed by the environment panel have reduced the expected impact of backloading on the supply-demand balance, analysts Kathrin Goretzki and Jochen Hitzfeld at UniCredit SpA said in a July 1 research note.
“We expect a price increase if the voting outcome is positive, but think it will be limited to a maximum of 5.50 euros a metric ton,” they said. “In the event of a renewed rejection of the proposal in parliament, we anticipate a price decline to 3.40 euros.”
The new version of the emergency fix is likely to win majority support in the Parliament, lawmakers Chris Davies of the Alliance of Liberals and Democrats for Europe and Peter Liese of the European People’s Party said on June 25.
Split on Backloading
While the EPP, the biggest group in the assembly, is split on backloading, several lawmakers who were against the proposal in the first plenary vote changed their minds, according to Liese. At the group’s internal meeting yesterday in Strasbourg, members voted 79 to 27 to reject the compromise version of backloading during today’s vote, EPP lead lawmaker on the measure Eija-Riitta Korhola said.
A decision in favor of backloading today would authorize Groote to start talks with representatives of national governments on the final wording of the legislation. The outcome of the talks will need official approval by the parliament and EU ministers.
In the second stage of the regulatory process, member states will decide on the details of backloading in a separate regulation, which will set the amount of allowances to be postponed and the schedule of auction delays. The measure will then become subject to a three-month scrutiny.
The EU is unlikely to start withholding first permits before mid-2014, later than the originally planned 2013, according to Itamar Orlandi, an analyst at Bloomberg New Energy Finance in London. Climate Commissioner Connie Hedegaard first floated the idea of backloading as a stopgap fix before a deeper overhaul of the cap-and-trade program in April 2012, when the price of permits was almost 8 euros.
Member states may decide about their position by “early fall,” according to Arunas Vinciunas, Lithuania’s Deputy Permanent Representative to the EU. His country holds the bloc’s rotating presidency in the second half of this year. While most EU countries favor backloading, they are short of the qualified majority needed to approve the proposal because several nations, including Germany, remain undecided. Chancellor Angela Merkel said in May she hoped Germany would be able to tackle the plan soon after elections on Sept. 22.
“We think the current backloading plan, which is already a compromise on a compromise, will not have any meaningful impact on CO2 prices,” Patrick Hummel, an analyst at UBS, said in a research note on July 1. “If at all, there is risk of a temporary moderate liquidity squeeze in the years 2014-15.”
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