EU Carbon Plunges 40% as Lawmakers Suggest Rejection of Glut Fix

European Union carbon prices plunged a record 40 percent after a panel in the 27-nation bloc’s parliament recommended rejection of a strategy to strengthen the world’s biggest cap-and-trade market.

The European Parliament’s industry committee advised against the plan by the EU’s regulatory arm to change the emissions-trading law to tackle a glut by 42 votes against versus 18 for. Carbon permits for December sank to a record 2.81 euros ($3.75) a metric ton immediately after the ballot.

“This should be the final wake-up call,” EU Climate Commissioner Connie Hedegaard said today in an e-mailed statement. “Something has to be done urgently. I can therefore only appeal to the governments and the European Parliament to act responsibly.”

At stake is the fate of the 54-billion-euro EU emissions trading system after an excess of allowances caused by an economic crisis drove prices down 91 percent from a record in April 2006. While the non-binding committee vote is only a recommendation for other members of the parliament, it highlights the division between lawmakers, whose support is ultimately needed to enact carbon-permit supply curbs.

The proposal by the European Commission to alleviate oversupply by delaying sales of some permits caused a rift among governments, industry organizations and lawmakers, sparking questions whether the EU needs the cap-and-trade system. The commission’s plan is “absurd” and will hurt German industry by pushing up their costs, Joachim Pfeiffer, Chancellor Angela Merkel’s CDU party economy spokesman, said today.

Economic Crisis

“The market is panicking really,” Daniel Rossetto, managing director of Climate Mundial Ltd. in London, which advises in emission markets, said by telephone. Carbon traders are concerned that the region’s greenhouse gas market may not continue beyond 2020, he said.

Most member states, whose approval is also needed for the so-called backloading plan to be implemented, remain undecided whether to back the fix, according to the EU presidency.

EU allowances pared some losses in the second part of today’s session and closed 6.9 percent down at 4.33 euros on London’s ICE Futures Europe exchange.

While the opinion of the industry committee in the EU parliament, known as ITRE, is disappointing, it came as no real surprise because it “has always been a conservative committee,” said Julia Michalak, policy officer at Climate Action Network Europe, a lobby group. “The vote in the environment committee will be the real test.”

Increased Uncertainty

ITRE has an advisory role in the legislative process to change the bloc’s emissions law. The environment committee is leading work on the draft measure in the Parliament and is due to vote on it next month. Its chairman, Matthias Groote, who supervises the proposal in the assembly, said today in a text message that a compromise was still possible in his panel.

The opposition in the industry committee indicates that the plenary vote that will follow a decision by the environment committee and ensuing talks with governments “is not a forgone conclusion,” according to Konrad Hanschmidt, a London-based analyst at Bloomberg New Energy Finance. The increased uncertainty will reduce any speculative buying from utilities and financial institutions, he said by e-mail.

‘Market Overreacted’

“This will make today’s oversupplied market even more fragile and potentially amplify the bearish pressure of auctions,” he said. “However, the market overreacted slightly today, as the ITRE vote does not fundamentally change the outcome of backloading.”

The draft law change, which confirms the commission’s right to decide the timing of auctions, is the first element of an EU strategy to reduce the glut of allowances. Once it is approved by governments and the parliament, the bloc will vote on a separate regulation setting out the details of auction delays.

To win the approval of member states, the backloading regulation would need 255 out of 355 votes in a ballot system that favors larger countries. The success of the proposal relies on German support, according to analysts including Trevor Sikorski at Barclays Plc.

The U.K., which together with Germany, Italy and France has the largest number of votes in the EU, yesterday set conditions for backing the measure. Britain would prefer delaying sales of 1.2 billion allowances, more than the 900 million proposed by the commission, and is seeking reassurances on a deeper overhaul of the emissions system that should follow backloading, the Department of Energy and Climate Change said.

National Systems

The EU needs to take long-term action to improve the market, “but before we can do that we also need to make sure that there’s something there still to discuss,” Yvon Slingenberg, head of the emissions-trading unit at the commission, told lawmakers in Brussels. The alternative to the EU carbon market is a patchwork of national systems, she said.

“Certain member states have already taken some national measures and it’s very likely and a big risk that if the price goes further down more national measures will be enacted,” she told members of the environment committee today. “And this is indeed fragmentation of the internal market which I think the industry is very attached to.”

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