Carbon Falls Most Ever After EU Parliament Rejects Fix

European carbon permits declined by the most on record to an unprecedented low after lawmakers rejected an emergency plan to address a surplus of allowances.

Carbon for December fell as much as 45 percent to 2.63 euros a metric ton on the ICE Futures Europe exchange in London, and German power prices for next year dropped to the lowest since at least 2007. Ireland, which holds the European Union presidency, vowed to continue talks on the plan after the bloc’s Parliament sent the draft back to its environment panel.

The rejection may render Europe’s 54 billion-euro ($71 billion) cap-and-trade program “completely toothless,” leaving prices near zero for several years, said Patrick Hummel, an analyst at UBS AG in Zurich. Opponents of the plan, including the Polish government and the European People’s Party, the biggest political group in the Parliament, have argued it would raise energy costs and artificially boost prices.

“We now expect waves of speculative selling, followed by industrials also liquidating their surpluses,” said Konrad Hanschmidt, an analyst at Bloomberg New Energy Finance in London. “There is still a theoretical chance that the measure may pass, but that is not looking at all likely.”

European carbon permits changed hands at 3.15 euros a ton at 4:34 p.m. amid record trading in the contracts. The price of the allowances may fall close to 1 euro a ton in the next several months, according to New Energy Finance.

Backload Rejection

Europe’s emissions trading system is the bloc’s main tool in meeting greenhouse gas-reduction targets, which it does by issuing companies with tradable permits that they must surrender to cover their carbon output. The euro area’s recession cut demand for the allowances, exacerbating a record glut that pushed prices down from as high as 31 euros a ton in April 2006.

The Parliament voted 334 to 315, with 63 abstentions, in favor of an amendment to prevent the European Commission’s proposal to alter the bloc’s emissions trading law. The change was meant to pave the way for a measure to delay the sale of some permits over the next three years and reintroduce, or backload, them to the market in 2019 and 2020.

Parliamentarians stopped short of blocking the rescue plan outright, and a separate proposal to put a definitive halt to the proposal in the first reading was rejected by 343 to 300, with 61 abstentions. Instead, the law change was sent back to the Parliament’s environment panel, chaired by Matthias Groote from the Socialists and Democrats group, who oversees the measure in the assembly.

“According to EU Parliament rules I have two months to come up with a proposal,” Groote said in interview in Strasbourg, France. “I plan to do that immediately.”

Decision Disappoints

Ireland said the decision was disappointing and national governments will discuss the carbon fix at two meetings of national diplomats in Brussels in the coming days. Environment Minister Phil Hogan “dismissed any suggestions that the commission should consider withdrawing the proposal,” according to an e-mailed statement from the Irish government.

To become binding, the carbon rescue plan needs support from both the Parliament and national governments in an EU vote system that favors larger countries. While most member states support backloading, several nations, including Germany, remain undecided on backing the proposal in the council of ministers, which represents governments.

“The lack of a clear position in the council hasn’t helped,” Groote, a German member of the Parliament, said after the vote. “I’d like to think the council will come with a coherent position that will give the light.”

Deeper Overhaul

German politicians reiterated their differing views on backloading today. The commission’s plan would mean “interfering with a functioning market system,” Economy Minister Philipp Roesler said in a statement. Environment Minister Peter Altmaier, who supports backloading, said Parliament’s vote was a setback for climate protection.

EU Climate Commissioner Connie Hedegaard, who proposed backloading last year as a stopgap measure before the EU agrees a deeper overhaul of the carbon program, said the vote was “not the total end of everything.”

“It’s up to the Parliament and member states now to decide what they will do next,” Hedegaard said in an interview. “The commission has defended the proposal because we thought we need to stop the carbon market from bleeding as we work on structural measures.”

The low cost of the allowances erodes the incentive for polluters such as utilities to stop burning cheaper fossil fuels such as coal and invest in carbon-efficient technology.

German power for next year, a regional benchmark, declined to its lowest in more than five years, sliding as much as 4.6 percent to 36.50 euros a megawatt-hour, according to broker data compiled by Bloomberg.

RWE AG and EON SE, Germany’s two biggest utilities, fell the most since July and November, respectively. Fortum Oyj, Finland’s largest utility, declined the most in almost nine months.