EU Lawmakers Approve Carbon Fix as Glut Widens: Energy MarketsEwa Krukowska
European Union lawmakers approved a rescue plan for the world’s biggest greenhouse-gas market, ending more than a year of political squabbling during which prices slumped to a record low.
The region’s Parliament voted today in favor of a measure to curb an unprecedented glut of pollution rights in the bloc’s $72 billion Emissions Trading System, a fix Societe Generale SA said may spur prices to rise about 7 percent next year. The plan is vital to restore trust in the market, said Johannes Teyssen, chief executive officer at EON SE, Germany’s biggest utility. He said the system was “dead” in February 2012.
Carbon allowances closed at a six-week high after EU assembly members approved a law change allowing permits to be temporarily withheld, a process known as backloading, to ease oversupply and lift prices from levels the European Commission says are too low to encourage investment in renewable energy. The proposal, which still needs the final approval of EU ministers, divided member states and industry for 16 months.
“Backloading is the first step, it’s totally clear,” Matthias Groote, head of the assembly’s environment committee and the lead lawmaker on the measure, told reporters in Strasbourg. “It was a safe majority in the end.”
EU carbon allowances slumped as low as 2.46 euros ($3.38) a metric ton in April and gained 2.5 percent today to 5.02 euros on ICE Futures Europe in London, the highest level since Oct. 29. The benchmark fell 25 percent from January as the Standard & Poor’s GSCI gauge of 24 commodities slid 2.6 percent and the Stoxx Europe 600 Index rose 13 percent.
EU Climate Commissioner Connie Hedegaard hailed the “solid” majority of votes for the draft law, and called backloading a reality on her Twitter account. Lawmakers voted 385 in favor of the measure, 284 were against and 24 abstained.
“It’s an extremely important political signal that the European community wants the ETS as the leading system,” EON’s Teyssen said Dec. 2 in an interview in Brussels. “We fully support backloading as the first step in sharpening this instrument.”
Under the bloc’s eight-year-old emissions trading system, permits allowing the holder to emit one ton of carbon dioxide into the atmosphere are allocated for free or auctioned to about 12,000 factories and utilities that must surrender enough securities to match their CO2 output or pay fines. Prices plunged from as high as 29.69 euros a ton in July 2008 as the financial crisis damped industrial output, curbing demand for pollution rights and aggravating the glut.
The surplus swelled to a record 2 billion tons at the end of last year, according to the EU. It will probably widen to 2.2 billion by the end of 2013, Bloomberg New Energy Finance says. To reduce the glut, the commission plans to delay the sale of 900 million permits, or about half the total annual limit for companies in the ETS, and return them to the market at the end of the decade.
Backloading “will tighten the market substantially,” said Itamar Orlandi, an analyst at New Energy, who forecasts permits will fetch 15 euros by the end of 2014. “This will buy time for a more thorough reform of the market, without which backloading will only have a temporary effect.”
Permits will probably rise to 5.35 euros next year, Paolo Coghe, a Societe Generale analyst in Paris, said in a Nov. 27 report. Short-term gains may be tempered because the approval of the fix is “pretty much priced in,” he said.
Representatives of member states in the EU’s Climate Change Committee are meeting tomorrow to discuss how the auction delays will be regulated. They may seek an agreement in principle on delaying sales of permits over three years starting in 2014 and returning them to the market in 2019-2020, two people familiar with the matter said last month.
The EU regulator submitted two alternatives for the panel to consider. The first would withhold 400 million allowances next year, 300 million in 2015 and 200 million the following year. Nations may also consider reducing the volumes of backloaded permits in 2014 and adjust supply in the following two years. The second scenario is a two-year backloading period, with 400 million allowances delayed from 2014 and 500 million from 2015.
The Climate Change Committee will vote once EU ministers decide on the amendment authorizing the market fix on Dec. 16. The commission may seek the panel’s consent before its next monthly meeting to accelerate the process.
Once adopted by the committee, the regulation will be scrutinized by the European Parliament and national governments before becoming law. The commission may seek to shorten the period to less than three months.
“Now it’s mainly a matter of working out when the first auction to be affected by backloading will take place,” said Milan Hudak, a carbon trader at Virtuse Energy sro in Prague. The vote “was the last chance for naysayers to block it.”
Allowances can start coming out of the market as early as April, Niall Mackenzie, head of industrial energy efficiency at the U.K.’s Department of Energy and Climate Change, said Dec. 5 at a conference in London.
Prices may still fall as nations allocate free permits to companies and sell allowances at auctions, according to Trevor Sikorski, the head of natural gas, coal and carbon at Energy Aspects Ltd., a London-based consultant.
The European Investment Bank in Luxembourg is selling 100 million permits from a special reserve set to aid low-carbon technologies. The sales began in November and will end in March.
“I’m not sure carbon is an immediate buy,” said Sikorski. “Maybe it is more of a buy after the first quarter of next year, when most of the free allocation should be in the market and there will be greater clarity on exactly when the volumes will be removed and then released.”
The commission announced its backloading legislation in July 2012. Lawmakers rejected the rescue plan in their first vote in April, arguing that it would raise energy costs and hurt competition. An amended version was approved in July. Today’s ballot in Strasbourg is on the final wording of the law that will enable backloading.
“It’s been a long, drawn-out process,” Tim Atkinson, a director at ETS Markets Ltd. in London, said by e-mail. “The uncertainty around backloading and delays in 2013 allowance issuances have really restricted activity” in the market for industrial companies seeking to meet emission targets, he said.
Representatives of EU governments reached an agreement on the measure in November, breaking a 16-month deadlock after German Chancellor Angela Merkel signaled support for the plan after her re-election on Sept. 22. Member states still need to provide formal consent and are scheduled to decide on the measure next week.
“Backloading is like the Die Hard movies,” said Andy Ager, head of carbon trading at Vertis Environmental Finance in Budapest. “Just when you think you’ve seen the last of it, along comes another installment.”