EU CO2 Market Eyes Assurance as Ministers to Discuss Fix

Investors in Europe’s 54 billion-euro ($70 billion) carbon market will be looking at the bloc’s ministers meeting in Dublin this week for assurances that governments will try to keep alive a plan to bolster prices.

Environment ministers from the 27 nations in the European Union gather today to start their informal bi-annual meeting, which takes place less than a week after the European Parliament declined to support a rescue plan for the EU emissions-trading system, the pillar of the EU’s climate policy. They will discuss policies for 2030 at a joint working lunch tomorrow with national energy chiefs, who are scheduled to arrive in the Irish capital for a separate meeting.

The Parliament on April 16 rejected a measure to curb oversupply in Europe’s cap-and-trade program amid concerns it will raise energy prices and undermine industry’s competitiveness. Its negative verdict triggered a record decline in emission prices. EU governments, which are split on the proposal for the world’s biggest cap-and-trade program, have an option of saving the fix, known as backloading.

“It’s not tabled for a specific discussion, but I’m sure it’ll come up in the context of the discussions tomorrow on our informal lunch on climate and energy policies,” Irish Environment Minister Phil Hogan told reporters before the meeting today. “Member states want to see the emissions-trading system continued, so it’s a question of seeing what amendments can be put forward at the Parliament level or at the council, in June or later on, maybe in July.”

Record Low

EU allowances for delivery in December slumped as much as 10.8 percent to 2.82 euros a metric ton before closing at 2.89 euros on the ICE Futures Europe exchange in London. They fell to a record low 2.46 euros last week following the Parliament’s vote.

The backloading strategy designed by the European Commission, the bloc’s regulatory arm, aims to help carbon prices rebound by delaying auctions of 900 million permits from 2013-2015 to 2019-2020. That would reduce a glut of allowances aggravated by an economic slowdown, which has curbed industrial output and damped demand for emission rights. The EU program doesn’t allow any price floors or ceilings.

“The market is currently supported by the hope of some market participants that backloading will come back,” said Ingo Ramming, co-head of commodity solutions at Commerzbank in London. “I am not sure if this is realistic but focus will be on this week’s meetings in Dublin.”

Carbon Market

The proposal to intervene in the carbon market has divided industry, the Parliament and EU governments. To be enacted, it needs support from the European assembly and 255 out of 345 government votes. While most countries endorse backloading they are short of a qualified majority as Germany and nations including Portugal and the Czech Republic remain undecided.

Any effort to revive the rescue plan will require the full support of German Chancellor Angela Merkel, according to Itamar Orlandi, analyst at Bloomberg New Energy Finance in London. Merkel has so far avoided a verdict on the proposal, which has pitted Germany’s climate and economy chiefs against each other. Environment Minister Peter Altmaier supports backloading, while Economy Minister Philipp Roesler of Merkel’s coalition partner Free Democratic Party opposes the market intervention.

Energy Policy

“Merkel needs to decide between the likely positive impact of backloading on her domestic energy policy and avoiding the ugly image of overruling her junior coalition partner,” Orlandi said. “She could therefore delay a decision until a politically more convenient moment closer to the September elections.”

A potential abstention by Germany in the council of EU ministers would effectively mean a vote against backloading. That would put Europe’s biggest economy in one camp with Poland, Greece and Cyprus, who object to the plan amid concerns it would raise energy prices and hurt the industry’s competitiveness.

“It’s unlikely that they will come to a definitive conclusion on the existing proposal, which has been rejected by the European Parliament, until after the general elections, but we’re prepared to wait and see if there’s any modest changes that can be made that can meet the wishes of the council, commission and the Parliament,” Hogan said. His country holds the EU rotating presidency until the end of June.

Fix Supporters

Supporters of the fix, including the U.K., Denmark and France, argue that the EU emissions trading system needs strengthening after prices dropped to a level that fails to encourage green investments. EU permits for December have lost as much 85 percent in the past four years, defying expectations by policy makers before the system started in 2005 that the cost of discharging one ton of greenhouse gases would be 25 euros to 30 euros.

The carbon rescue plan is necessary to stimulate investment in clean technologies and avoid fragmentation of the EU single energy market through a patchwork of national policies, 42 companies and associations including Germany’s largest utility EON SE said earlier this month.

While the first element of the backloading strategy, a change to the EU emissions-trading law, was rejected by the Parliament last week, lawmakers stopped short of adopting an official position against the rescue plan. Instead, the measure was sent back to the environment committee, which now has two months to propose a solution.

“The only way I see some shift in the Parliament is if the council takes a position and the only way to get the council moving is Merkel,” Bas Eickhout, a Dutch member of the Greens group in the European assembly said in a phone interview on April 19. “The other option is the commission, which can put forward a new proposal and hopefully that would put new dynamics in the Parliament.”

Climate Policies

The divisions on the stopgap measure for the carbon market highlight the difficulty for the EU to agree the shape of post-2020 climate policies. The commission has repeatedly said that new emission-reduction targets should be set as soon as possible to ensure regulatory predictability for investors. It wants to propose new legislation toward the end of this year, before a global climate deal for post-2020 that nations worldwide aim to reach by 2015.

Bulgaria, the Czech Republic, Hungary, Poland, Slovakia and Romania said in a joint statement last week that decisions on EU climate policy for 2030 and negotiations on the global framework “should go hand in hand.”

Environment ministers from those six countries “agreed that it is necessary to have a long-term vision but stressed the need to take into account national and sectoral circumstances and the assessments on how member states have delivered current targets and how it impacted their development,” according to the statement after their meeting.

Before it's here, it's on the Bloomberg Terminal.