The European Union cut the number of free carbon permits distributed to its member states by 5.7 percent this year, applying a reduction rate near the middle of a range expected by analysts.
The cutback will gradually increase to 18 percent in 2020 to ensure the number of free permits requested doesn’t exceed the maximum allowed under the EU law, the European Commission said on its website today. EU governments will take another one to three months to hand out allowances to companies in the bloc’s 53-billion-euro ($69.5 billion) emissions trading system. The distribution was due to take place in February.
“For 2013, the result is a maximum amount available for free to industry of 809.3 million allowances,” the commission said. The total emissions cap for this year was set at 2.084 billion permits.
Estimates for the 2013 cutback varied from about 2 percent expected by Bloomberg New Energy Finance, to 15 percent by Ecofys, the Utrecht, Netherlands-based environmental research company. As the world’s biggest carbon program moves to a greater share of auctioning, emitters will get free permits accounting for about 43 percent of the cap in the 2013-2020 trading period, under today’s decision.
The delay in the distribution of free allowances, caused by a tardy submission of national requests, helped temporarily alleviate a surplus in the carbon market and drive prices higher. Permits for delivery in December rose 5.3 percent last month, rebounding from a record of low 2.46 euros in April.
EU allowances advanced as much as 9.9 percent to 5.02 euros a metric ton on the ICE Futures Europe exchange in London today before closing at 4.98 euros. That’s still a fraction of the 36.43 euros the December 2013 permits cost in July 2008, before an economic crisis cut industrial demand and helped create a glut of allowances.
The EU’s eight-year-old emissions trading system allocates for free or auctions allowances to about 12,000 factories and utilities which must surrender enough permits to match their discharges of carbon dioxide or pay fines. Those that emit less than their quota can sell allowances they don’t use.
Allocation of free permits to individual companies was cut across all sectors as countries applied for more permits than available.
The reduction of free permits will weaken Europe’s efforts to keep companies from relocating to regions without emission curbs, and “will deal yet another blow” to the region’s refining industry, according to Europia, the industry lobby whose members include Exxon Mobil Corp.
The EU agreed in 2009 to give a larger share of free permits to 164 manufacturing industries, including most steel-related factories. Manufacturers that aren’t on the list will receive 80 percent of benchmarked allowances for free in 2013 and face an annual decline in that share to 30 percent in 2020, while most utilities are subject to 100 percent auctioning as of this year.
“If the commission is serious about its declared intention to better balance the competitiveness, security of supply and sustainability aspects of our current climate and energy policy, its decision should be based on a reliable assessment of the manufacturing industry’s contribution to total EU greenhouse gas emissions,” Europia said in an e-mailed statement today.
Today’s decision means that the EU will need to adjust its carbon-permit auctioning calendar, which was determined last year based on estimates of free allocation, according to the commission. The bloc will next year sell about 66.3 million more allowances that should normally be auctioned this year.
“Adding a considerable volume in the last two or three months of the calendar year and adjusting the auction calendars accordingly may disrupt the market,” the commission said. Calendars for the European Energy Exchange and the ICE Futures Europe exchange are under preparation, it added.