Carbon Permits Rise to 7-Week High as EU Regulator Hastens Vote

Carbon prices jumped to the highest in seven weeks after the European Union scheduled an extra meeting of nations on a plan that will temporarily reduce a surplus of emission permits that pushed prices to a record low.

The European Commission wants EU governments on Jan. 8 to back a proposal to delay sales of 900 million tons of carbon allowances in 2014-16 before they are returned, or backloaded, to the market at the end of the decade, the bloc’s regulator said in a statement today. EU emission allowances for December 2014 rose 0.8 percent to the highest for a front-year contract since Oct. 29.

Should the market fix begin in March, the volume of allowances delayed next year will be 400 million, under the commission’s proposal. For every quarter of delay, that amount will be cut by 100 million, which will be added in equal shares to the 2015 and 2016 backloaded volume. The commission said the strategy will probably start by June.

“We expect backloading to begin in May, meaning 300 million tons will be withheld over 2014,” said James Cooper, an analyst at Bloomberg New Energy Finance in London.

The rescue may help prices in the EU’s cap-and-trade program recover from current levels, which are too low to spur investment in low-carbon technologies, according to the commission. The permits lost about 68 percent in the past four years as an economic crisis curbed demand, pushing the surplus to 2 billion tons at the end of last year, including United Nations emission credits, according to the EU.

EU carbon permits closed at 5.03 euros ($6.87) a metric ton on the ICE Futures Europe exchange. The benchmark slumped to a record low of 2.46 euros in April.

Climate Committee

The backloading proposal is to be voted on next month by the Climate Change Committee, which includes climate officials from the bloc’s 28 member states.

Should backloading start in the second quarter of 2014, the amount of permits to be delayed in 2015 would be 350 million and for 2016 it would be 250 million, according to today’s commission statement.

Under the European emissions trading system, tradable 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 output or pay fines.

The plan to link the schedule of the market fix to its starting date was favored by most governments in the last meeting of the Climate Change Committee on Dec. 11. This option also ensures that supply curbs don’t affect the continuity of nations’ carbon-permit auctions.

Starting backloading in May would reduce that month’s auction volume “by 53 percent to a total 38 million tons compared with the current auction calendar,” Cooper at New Energy Finance said.

The backloading measure needs a qualified majority from member states in the committee to be approved. Following the vote it will become subject to scrutiny by the European Parliament and ministers from national governments. The commission has the right to seek a shorter evaluation period than the typical three months.

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