EU Carbon Falls as Nations Opt for Flexible Surplus-Fix Option

Carbon fell for the first time in six days after European Union governments gave their initial support to the most flexible version of a rescue plan for the bloc’s emissions market.

Carbon allowances declined as much as 5.2 percent after member states at a EU Climate Change Committee meeting in Brussels favored a scenario that withholds fewer permits from auctions in 2014 than the 400 million under an alternative option. The emergency plan aims to delay the sale of a total 900 million allowances from 2014 through 2016 to curb a record glut of permits and help prices recover from record lows.

“I’m surprised by the Climate Change Committee’s agreement,” said Milan Hudak, trader at Virtuse Energy sro in Prague. “We had assumed that delaying the sale of 400 million permits in 2014 was more or less decided.”

Representatives of national governments spoke in favor of starting the supply curbs swiftly at today’s meeting, the European Commission said in a statement. The panel is due to decide about the details of the market fix, known as backloading, in January.

Permits for December closed down 2.8 percent at 4.88 euros ($6.73) a metric ton on London’s ICE Futures Europe exchange after earlier falling to as low as 4.76 euros after the committee statement was released.

More Bullish

The favored option means that the number of permits to be delayed at auctions in 2015 and 2016 also will be adjusted. Governments will decide about the exact volumes for each year when they vote on the measure next month.

“This should be more bullish for December 2015 and 2016 prices, as less volume delayed in 2014 means more delayed in 2015 and 2016,” Hudak said. “Companies will need to buy more permits as they are getting fewer free allowances over time.”

The Climate Change Committee also considered two other backloading scenarios. One was to delay sales of carbon permits over two years, between 2014 and 2015. Another was postponing 400 million allowances in the first year, 300 million in the second and 200 million in the third, with no flexibility.

Under the European emissions trading system, permits allowing the holder to emit one ton of carbon dioxide are allocated for free or auctioned to factories and utilities that must surrender enough 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 plan to temporarily curb the oversupply by delaying carbon-permit auctions was proposed by the commission in July last year. It included two elements: a change to the EU emissions trading law to enable backloading, and a measure to set out the details of the market fix.

The European Parliament approved the legislative amendment yesterday and governments are to sign off on it next week. The regulation on the timing and volumes of backloading needs to undergo a scrutiny by the Parliament and ministers before it becomes binding. The commission can seek a shorter scrutiny period than the regular three months.

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