Germany Eyes Carbon-Market Reserve Start Five Years Early

Germany said an overhaul of the European Union’s carbon market to automatically tighten supply should begin at the latest in 2016, five years earlier than proposed by the bloc’s regulatory arm.

The 28 EU nations began talks last month on the plan to introduce a stability reserve mechanism for the $72 billion emissions trading system. The draft measure, designed to introduce automatic supply curbs or injections from 2021 to avoid imbalances, requires qualified-majority support from member states and majority backing from the European Parliament to be amended and take effect.

An earlier start of the supply controls would ensure the revitalized cap-and-trade program is “synchronized” with tightening of the EU’s overall carbon-reduction target to 40 percent by 2030, Michael Schroeren, spokesman for Germany’s Environment Minister Barbara Hendricks, said by telephone from Berlin today.

EU member states were split on the proposal by the European Commission in their first debate about the future climate and energy framework during a March 3 meeting of environment ministers in Brussels. Nations including Germany and Denmark advocated early implementation of the mechanism, while six central and east European countries led by Poland urged more analysis of the plan’s effect on the economy.

Polish Votes

To be approved by member states, the draft law will need 260 out of 352 government votes in the EU weighted-ballot system, under which Germany has 29 votes and Poland 27. The measure was designed as a permanent mechanism to follow the EU emergency market fix known as backloading, which will withhold 900 million allowances at auctions between 2014 and 2016 and return them to the market in 2019-2020.

The EU should advance the stability reserve’s creation to 2017, the first year after backloading of permits ends, to better deal with a glut in supply, according to Martin Schoenberg, the head of policy at London-based Climate Change Capital, a unit of White Plains, New York-based Bunge Ltd.

“2017 would lead to smoother price development,” he said by phone from Brussels yesterday.

The Parliament, whose consent is needed to modify and adopt the draft law, will start work on it in September, after elections in May and a summer recess in August, Matthias Groote, who heads the assembly’s environment committee, said in an interview yesterday.

Surplus Permits

The measure was proposed in January as part of a strategy on climate and energy policies for 2030, under which the commission also wants to deepen EU emissions cuts from 20 percent in 2020 compared with 1990 levels. The supply of permits will be reduced if there’s an accumulated surplus of at least 833 million metric tons, according to the draft law. If the surplus fell below 400 million tons, the EU would begin returning allowances to the market from the reserve.

The cap-and-trade program had an excess of about 2.2 billion allowances at the end of last year, according to commission estimates. Coupled with an economic crisis and inflows of cheaper imported emission credits, it helped drive the price of EU carbon allowances to a record low of 2.46 euros ($3.40) a ton in April. The permits rose 0.3 percent to 6.88 euros on the ICE Futures Europe exchange as of 4:55 p.m. in London today.

The ETS, started in 2005, imposes decreasing pollution caps on about 12,000 installations owned by power producers and manufacturers including EON SE and ThyssenKrupp AG. Each year they must surrender enough permits, which they get for free or must buy at auctions, to account for their discharges or pay fines amounting to 100 euros a ton.

Initial Talks

EU nations are also split on the 2030 climate goal, which will be subject to a separate law that the commission will propose after EU leaders reach a political agreement on the level of emissions cut the bloc should pursue. Heads of state and government will have a first discussion on the strategy at their March 20-21 summit and a decision is expected by the end of this year, an EU official, who can’t be identified because of the bloc’s policy, said Feb. 28. That political decision will require unanimity under EU rules.

Should EU leaders back the 40 percent carbon-cut goal for 2030, a draft law to implement it will include a provision to accelerate the pace of emissions reductions in the ETS. The so-called linear reduction factor would increase to 2.2 percent per year starting from 2021, compared with 1.74 percent now, the commission has said.

The U.K. this week restated its call for pre-2020 cancellation of an “ambitious volume of allowances” to restore the balance between supply and demand. The proposed market stability reserve and a deeper target in 2030 “are not enough to achieve this,” the Department for Energy and Climate Change said in a statement on March 4.

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