EU Parliament Snub Leaves Fate of Carbon Fix to Governments

The rejection by the European Parliament of a proposed fix to the world’s biggest carbon market leaves the fate of the rescue plan in the hands of the bloc’s governments, which have an option to override the assembly’s verdict.

The 27 European Union governments reached no breakthrough at a meeting in Brussels today to discuss a draft change to the EU emissions law that would enable temporary curbs on the supply of carbon permits in the 54 billion-euro ($70.5 billion) market. The strategy, which involves delaying, or backloading, the issuance of some allowances, was rejected by the Parliament on April 16, triggering the biggest-ever drop in permit prices.

The backloading proposal, which has divided EU nations, industry and the Parliament, remains alive and the assembly can’t put an end to it unless the governments fail to support the plan, according to Terhi Lehtonen, environment adviser to the Greens group in the assembly. “Member states have to take positions,” Lehtonen said yesterday in an interview in Strasbourg, France. “They can’t hide behind the Parliament.”

The emergency carbon fix proposed by the European Commission aims to help prices in the world’s largest cap-and-trade program rebound after a recession curbed industrial output and demand for pollution rights. The economic slump aggravated a glut of permits that swelled to about 1 billion metric tons last year, or half the average annual pollution limit in the EU emissions market.

Commission’s Proposal

The Parliament voted 334 to 315, with 63 abstentions, in favor of an amendment to prevent the commission’s proposal to alter the bloc’s emissions-trading law. The change is meant to pave the way for a measure to delay the sale of 900 million permits over the next three years and reintroduce, or backload, them to the market in 2019 and 2020.

EU emission allowances for December fell as much as 45 percent to an all-time low of 2.63 euros a metric ton after the vote and shares in utilities including RWE AG, EON SE and Fortum Oyj declined. European policy makers expected a price of around 25 euros to 30 euros per ton when the system was started eight years ago, a level they said would encourage a shift to green technologies.

Parliamentarians stopped short of adopting an official position against the rescue plan, and a separate proposal to end the first reading was rejected by 343 to 300, with 61 abstentions. Instead, the measure was sent back to the assembly’s environment committee, where political groups will discuss its future again.

‘Engage Further’

The vote was “not the end of the story,” Isaac Valero-Ladron, climate spokesman for the Brussels-based commission, said on his Twitter account. The EU executive will press for an agreement with member states and “engage further” with the Parliament, he said.

Matthias Groote, chairman of the Parliament’s environment panel, now has two months to come up with a new report or draft changes to the commission’s proposal that would be acceptable for a majority of members. He wants to present a solution “immediately,” Groote said in an interview on April 16.

Karl-Heinz Florenz, a German member of the EPP who was against backloading and endorsed referring the draft law change back to the environment panel, said his vote was meant to be a signal that he’s “willing to work on the future” of the EU emissions trading system, or the ETS.

Environment Committee

“I think the backloading proposal is more or less dead for the EPP,” Florenz said in an interview in Strasbourg. “For me the door is mostly not closed, but I don’t see any solution in the environment committee that the whole Parliament could accept.”

Florenz, a member of the environment panel, said his vote against the proposed law change was one of the most difficult decisions he has ever made. While he “absolutely” doesn’t want to kill the ETS, he couldn’t back the draft law change because it interfered with the market character of the program, he said.

As the committee considers the future of backloading, member states could signal their informal support provided they are confident of the qualified majority they need to approve the measure, said Paolo Coghe, analyst at Societe Generale in Paris. Nations can adopt a formal position only after the Parliament ends the first reading, according to EU rules.

‘Many Uncertainties’

“It’s very difficult to predict if backloading becomes a reality; there are too many uncertainties,” Coghe said. “If it doesn’t, the market may fall a little more, to around 1 euro or 1.50 euros. One can argue that its relevance would be severely diminished, but I’m pretty sure that as soon as the economy picks up a bit and talks on structural options start moving forward the ETS will come to the fore again,” he said.

A meeting of climate officials from member states today in Brussels didn’t bring any breakthrough, according to two EU government officials, who asked not to be identified, citing policy. Ireland, which holds the EU’s rotating presidency until the end of June and favors backloading, announced at the meeting it’s planning to next raise the issue at a working group in the middle of May, the officials said.

To be enacted, the plan needs support from the EU assembly and 255 out of 345 government votes. European countries are “getting there” to endorse it, EU Climate Commissioner Connie Hedegaard said last month.

The lack of a strong signal from EU member states before Parliament’s vote was one of the reasons why the assembly blocked the proposal, according to Groote. The rejection may now give some undecided nations a reason to further delay their official positions, said two EU officials who declined to be identified citing policy.

‘Wrong Way’

Several countries, including Germany and the Czech Republic, haven’t declared yet whether they will back the proposed rescue plan. The Parliament’s vote showed that “backloading is a wrong way to go,” according to Environment Minister Marcin Korolec of Poland, which opposes the fix together with Cyprus and Greece amid concerns that the measure will increase energy prices.

Should member states muster a qualified majority for backloading, the Parliament is ultimately unlikely to prevent it from being enacted, Lehtonen said. Following the talks in the environment panel, lawmakers may either back the plan and agree on negotiations with member states or confirm their initial verdict and formally reject the proposal in the first reading.

Absolute Majority

That would start the second reading, in which opponents of backloading will need an absolute majority, or 378 ballots, to change or scrap the proposal. If they fail to muster the required majority, the measure would be deemed adopted as proposed by member states, who can amend the original version drafted by the commission.

“The decision to send the backloading proposal back to the committee was to signal that the Parliament is open for a compromise,” Lehtonen said. “The Parliament can’t kill the measure until the second reading and given the result of the first vote there’s no majority for it. It’s up to member states now to decide.”