EU May Propose Carbon Permit Reserve Next Year to Combat Surplus

The European Commission may propose next month a law to manage the supply of carbon permits as a way of combating a surplus that drove prices to a record low, said Jos Delbeke, head of the regulator’s climate department.

A reserve mechanism to add or release pollution rights may help reduce a glut of more than 2 billion metric tons of permits, Delbeke, the commission’s Director-General for Climate, said in Brussels yesterday. He spoke after European lawmakers approved a plan to delay temporarily the sale of 900 million allowances in a process called backloading.

The commission plans to present next month a package of measures to be considered by governments as the 28-nation bloc analyzes future energy and climate policies. While a deep overhaul of the EU carbon market has to be linked with emissions targets for 2030, which are yet to be decided, a mechanism to make the supply of permits more flexible could be enacted before 2020, according to Delbeke.

“It will be important after 2020 and it is important before 2020, because that surplus is hanging there, and according to the best calculation, that surplus will remain there until 2025,” Delbeke said.

EU allowances for December declined 1.8 percent to 4.93 euros ($6.79) a metric ton on London’s ICE Futures Europe. They’ve fallen 26 percent this year.

Under the bloc’s emissions trading system, the world’s biggest, permits to emit one ton of carbon dioxide are allocated for free or auctioned to polluters that must surrender enough to match their CO2 output or pay fines.

Nightmare Glut

The glut built up as industrial output fell from 2009 through 2011, energy efficiency rose and the use of United Nations carbon offsets by EU emitters to meet emissions targets soared, Delbeke said. The excess may swell to as much as 2.2 billion tons by the end of this year, Bloomberg New Energy Finance data show.

“The build-up of that surplus of permits that hangs there since 2012 is a real nightmare,” he said. “I’m more than happy that the European Parliament decided on the backloading proposal, which is step one to take out part of the surplus.”

The commission held consultations this year on how to follow up backloading with a permanent solution to the oversupply, he said. It’s planning to issue a legislative proposal in early 2014.

Such a mechanism would be rules-based, non-discretionary and focused on the supply of allowances rather than price, he said. It would only be applicable in exceptional circumstances such as large demand shocks.

“We are reflecting on an ETS reserve mechanism that would add or release allowances into or from a reserve by deducting or adding them from or to future auction volumes,” Delbeke said. “We are not going to take them out of the accounts of key players.”

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