EU Carbon Has Record Drop as U.K. Sets Conditions for Glut Fix

European Union emission permits had their biggest one-day decline after the U.K. set conditions for approving a plan to fix a supply glut and Prime Minister David Cameron pledged a referendum on leaving the bloc by 2017.

European carbon allowances for December dropped 15 percent after a Department of Energy and Climate Change official in London said the EU commission in Brussels needs to increase the number of allowances for removal from the market through 2015 to 1.2 billion metric tons. That’s 33 percent more than the bloc’s regulatory arm proposed Nov. 12, to make the glut fix work.

Permits for December dropped 80 cents to close at a record 4.65 euros ($6.18) a ton on London’s ICE Futures Europe exchange. The fall was the biggest since the contract was first offered in April 2008. Allowances advanced 10 percent yesterday, the biggest increase in more than a year. Certified Emission Reduction credits for December fell 8.1 percent today to 34 euro cents a ton.

The commission may need to detail a timetable for permanent changes to the market’s rules that would mend the oversupply, the U.K. official said in an e-mail responding to questions. The person declined to be named because of government policy. Britain is working on an alternative proposal to return the 900 million delayed allowances back to the market after 2020 rather than in the previous two years, the official said.

The so-called carbon backloading strategy needs support from national governments in a ballot system that favors larger countries. Should the U.K. decide to abstain, its votes will be counted against the proposal, putting the country in one group with Poland and other opponents.

German Support

“I still think the success of any proposal sits with German support and maybe this is posturing to try and convince Germany to compromise in the middle and accept the backloading plan as is,” Trevor Sikorski, an analyst in London for Barclays Plc, said today in an e-mailed statement.

Carbon allowances have plunged 30 percent this month as the EU emissions trading system, or the ETS, began auctioning a greater proportion of allowances and most nations remain undecided whether to back the rescue plan designed by the commission.

“We are pleased to have so explicit confirmation that the U.K. is not only in favor of ambitious backloading but also strongly supports swift progress on structural measures as the second, necessary step in our efforts to address the problems of the emissions trading system,” Isaac Valero-Ladron, climate spokesman for the commission, said today by text message.

EU Climate Commissioner Connie Hedegaard yesterday called on countries that “want a strong ETS but haven’t made up their minds” whether to back the current proposal, to vote in favor of it. It’s an “exceptional” emergency measure that needs to be adopted urgently, she told a seminar in Brussels.

Deeper Changes

Britain “would have preferred a much more ambitious proposal,” the department, known as DECC, said in the e-mail.

The EU is preparing to start a discussion on long-term scenarios for its emissions program after the commission outlined six potential options to strengthen it in a policy paper last year. Any deeper changes to the design of the market would require a change of existing EU legislation or a new law approved by national governments and the European Parliament.

Britain is seeking more reassurance on the links between the temporary fix and more permanent reform, according to DECC. The easiest way to make that link may be for the commission to “provide a comprehensive timetable setting out their next steps following publication” of the policy paper, it said.

“We’ve always wanted more ambitious proposals,” Ed Davey, secretary of state for energy and climate, said today in an interview in London. “We’ve got to look with our colleagues who share that very ambitious approach.”

The U.K.’s alternative to its proposal to withhold 1.2 billion permits would require the EU to return 900 million tons of allowances to the market later than 2020.

“It would also allow all concerned parties much more time to discuss and implement structural reform before the threat of a further price crash materializes,” DECC said.

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