EU Carbon Advances as Latvia Pushes for Reform Deal Next Week

The European Union presidency is seeking agreement next week on the final shape of the bloc’s carbon-market reform after governments endorsed faster and tougher steps to curb a glut of emission permits.

Carbon futures in the world’s biggest cap-and-trade program touched a two-month high, bringing their gain for April to 8 percent, the most since November. EU member states, under the presidency of Latvia, decided Wednesday to seek the 2019 start of a carbon-market reserve to absorb surplus permits, two years earlier than proposed by the European Commission.

The mandate by the EU Council, representing governments, will serve as their negotiating position in the May 5 talks with the bloc’s Parliament and the commission, a process known as the trilogue. Member states also endorsed the transfer of delayed and unused permits to the planned reserve before the end of the current trading period in 2020, a move that will help contain a surplus.

“We hope that the European Parliament will also be constructive and orientated towards faster adoption of the file,” Latvia, the holder of the EU rotating presidency, said in an e-mailed reply to questions. “The Presidency hopes that the trilogue next week will be the final one.”

Carbon futures for delivery in December rose to as much as 7.64 euros ($8.55) a metric ton, the highest since Feb. 25, on ICE Futures Europe. The contracts were trading up 0.1 percent at 7.51 euros as of 11:53 a.m. in London.

Carbon Reserve

The carbon market reserve would automatically absorb allowances in the EU emissions trading system if the surplus exceeds a fixed limit, and release them to the market in the event of a shortage. That would ease an excess of permits that led to a 75 percent drop in the price of emission permits since 2008.

“The endorsement of an early start brings the Council’s position closer to that of the Parliament, increasing the momentum towards a smooth adoption of the market overhaul,” said Jerry van Houten, an analyst at Bloomberg New Energy Finance in London.

The starting date and scope of the reserve divided member states, with Germany and the U.K. pushing for an introduction as early as 2017, and Poland leading a group of eight countries opposing a launch of the reform before 2021. In the vote Wednesday, the Czech Republic and Lithuania left the Polish-led coalition blocking an early start, while Austria voted against the mandate, according to two people with knowledge of the matter.

Solidarity Provision

Representatives of member states agreed at Wednesday’s meeting to temporarily exempt the extra allowances awarded to some states under the so-called solidarity provision from being included in the reserve, said the people, who asked not to be identified because the meeting was private. The exemption may last until 2030, though the date was put in brackets in the text, meaning it may be subject to a change.

The mandate for negotiations with the Parliament doesn’t include a fund to develop innovative technologies, which the presidency originally proposed in a draft on April 24. The EU assembly wants to create such a financing tool based on 300 million unused allowances until 2025.

The Parliament’s position also includes a start of the carbon-market reform by the end of 2018 and transfer of all delayed and unallocated permits to the reserve.

Any agreement in negotiations between the Parliament, member states and the commission will need to be confirmed by representatives of national governments and the assembly’s plenary.

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