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EU Nations Authorize CO2-Market Fix Talks With Parliament

European Union governments approved a mandate to start talks with the bloc’s Parliament on a draft rescue plan for the EU carbon market, overcoming a 15-month deadlock over the measure to alleviate a record surplus.

EU carbon allowances fell to their lowest in more than two months, even as EU member states agreed to advance work on the draft law that aims to help prices recover from all-time lows. Nations agreed that their negotiating position will be to approve the measure as amended by the European Parliament in July, the bloc’s presidency said in a statement. That would accelerate talks on the plan.

“There is a pressing need to redress the carbon price and reassure markets that the EU is serious about ensuring the proper functioning of its Emissions Trading System,” said Lithuania’s deputy ambassador to the EU, Arunas Vinciunas. His country holds the rotating presidency of the bloc.

The draft measure, which needs approval from EU governments and the Parliament to become law, was proposed last year as a temporary fix to alleviate a record oversupply of emission permits, aggravated by an economic crisis. The European Commission, which designed the emergency plan, wants to propose a deeper overhaul of the 53 billion-euro ($71 billion) market at the turn of the year.

Government Auctions

Carbon permits for delivery in December plunged as much as 8 percent to 4.42 euros a metric ton, the biggest fall in three weeks, erasing earlier gains on the ICE Futures Europe exchange. The contracts closed 6.5 percent lower at 4.49 euros.

Even as backloading seems a done deal, prices are under pressure from government auctions and sales of allowances from a special reserve by the European Investment Bank in the next months, according to Bostjan Bandelj, director at Belektron in Ljubljana.

“In any case there are 500 million more EU allowances coming before anything is implemented,” he said in an e-mail. “To guys going all-in on the long side I say -- good luck!”

Emissions prices in the world’s biggest cap-and-trade program have declined 72 percent in the past four years as a slump in industrial output cut demand for pollution rights. The cost of pollution, which decreased to a record low of 2.46 euros a metric ton in April, is too low to encourage investment in clean technologies and help Europe shift to a low-carbon economy, the commission has said.

“We are pretty much back to the fundamentals which have kept the market at 4.50 euros and above since August,” Krzysztof Piatek, a trader at Vertis Environmental Finance, wrote on the company’s website.

12,000 Installations

The EU ETS covers about 12,000 installations owned by utilities and manufacturers in the region, from Germany’s biggest power producer, EON SE, to the world’s largest steelmaker, ArcelorMittal. Emitters in the system, in which pollution is set to fall by 21 percent in 2020 from 2005, are subject to decreasing quotas of carbon discharges and may trade allowances among themselves. One allowance covers 1 unit of carbon dioxide.

The deadlock over backloading was overcome after German Chancellor Angela Merkel’s party and the Social Democrats, which are in coalition talks after general elections in September, agreed the EU market needed a fix. Merkel’s second-term government couldn’t agree a position on the draft measure amid opposition from the Free Democratic Party.

The green light from member states to backloading comes three days before the United Nations climate summit in Poland, where the EU wants to be seen as a leader in the fight against global warming. The bloc has a binding target to reduce emissions by 20 percent in 2020 from 1990 levels and started earlier this year a debate about a 2030 framework.

Climate Protection

“The EU is sending the signal that we’re serious about climate protection, just a few days before the start of the climate conference in Warsaw,” German Environment Minister Peter Altmaier said today in an e-mailed statement.

The adoption of the mandate today paves the way for talks about the final wording of the backloading measure between Lithuania, representing member states, and the parliamentary team, led by the chairman of the environment committee, Matthias Groote. Out of 28 nations in the EU, 26 were in favor of the mandate and two -- Poland and Cyprus -- opposed it, according to two people with knowledge of the matter, who asked not to be identified, citing policy.

The outcome of negotiations will need to be backed by the whole assembly and by ministers before the measure enters into force. The Parliament has set an indicative date for a plenary vote on backloading for Dec. 10.

Initial Vote

“EU governments endorsed our proposal without any change, thus allowing us to move forward quickly,” Groote said in a statement today. “We will aim for a confirmation vote at the Dec. 9-12 plenary session.”

The Parliament, which held an initial vote on the draft in July, amended the original text proposed by the commission by limiting the planned intervention in the emissions market to a one-time move and capping backloading at 900 million permits.

“This is a step in the right direction, needed to stabilize the carbon market,” Isaac Valero-Ladron, climate spokesman for the commission, told reporters today. “I would think that within the next few weeks, two weeks, we would have the final agreement, but that will depend on the Parliament and governments.”

In the next stage, member states will need to vote on a separate regulation to set out the details of backloading, including the exact timing and volume of allowances to be postponed. The commission has said its original proposal to delay sales of 900 million allowances from 2013-2015 to 2019-2020 will need adjustment. A decision by governments on that could be taken in three to four months, according to Valero-Ladron.

“The market will now focus increasingly on the ‘when’ and ‘how’ of backloading rather than the ‘if’, with more details expected in late December or January,” said Itamar Orlandi, analyst at Bloomberg New Energy Finance in London.

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