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Carbon Posts Biggest Weekly Gain in 4 Months on EU Reform Plan

Carbon permits posted their largest weekly gain since September as the European Commission plans rule changes to the world’s biggest greenhouse gas market to fix an oversupply.

European Union allowances climbed 12 percent this week after reaching 5.30 euros ($7.19) a metric ton, the highest in more than two months, on ICE Futures Europe in London. EU proposals for post-2020 carbon market reforms to be unveiled next week may buoy prices “in the long run,” according to Itamar Orlandi, an analyst for Bloomberg New Energy Finance.

The market overhaul will follow the EU’s plan to postpone the sale of as many as 400 million allowances this year, equivalent to a fifth of annual supply. The plan, known as backloading, is intended to lift carbon prices from levels the European Commission said are too low to spur investment in renewable energy. Allowances slumped to a record 2.46 euros a ton in April.

“The key upside for prices depends on how ambitious is the EU proposal for a structural reform of the carbon market, to be presented Jan. 22,” Dario Carradori, an analyst at Goldman Sachs Group Inc., said today in an e-mailed report.

Carbon closed unchanged at 5.15 euros a ton, ICE data show. The contract rose 17 percent in the week ended Sept. 6.

Reserve Mechanism

The commission is seeking to introduce a reserve mechanism in 2021 that will automatically withdraw or add permits sold at auction, depending on the number of allowances in circulation, according to a draft proposal obtained by Bloomberg News. It also wants an amendment to the bloc’s emissions-trading law to enable sales of some carbon permits in 2020 to be carried over in the following two years.

The commission will next week present proposals for future climate and energy targets for consideration by the bloc’s leaders at a summit in March.

Oversupply will keep carbon prices under pressure until after 2025, Carradori said. Evidence the EU will rely on its emissions market to spur climate protection rather than impose overlapping renewable targets may help boost prices, he said.

“We believe the most bullish scenario for carbon prices and utilities would be a single target for carbon emissions reduction, as this would indicate that the EU plans to achieve emissions cuts through a higher carbon price rather than through renewables growth,” he said.

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