EU Carbon Reform Breakthrough Seen Unlikely as This Month

European Union governments are unlikely to reach a breakthrough this month on a proposal to make supply more flexible in the world’s biggest carbon market, according to Greece, which holds the EU’s rotating presidency.

Climate officials from the 28 EU nations will next discuss the draft law at a meeting on June 16 and are unlikely to agree a common position, said Kyriakos Psychas, Greek environment attache in Brussels. The proposal to introduce a stability mechanism to adjust supply in the $73 billion carbon market needs support from EU governments and the European Parliament to become binding.

“I do not foresee any big decisions by member states this month,” Psychas said by telephone today. “We will have a discussion and some member states may comment, but I would not expect a breakthrough.”

The stability reserve measure was proposed by the European Commission in January as part of a strategy on climate and energy policies for 2030, under which the commission also wants to deepen EU greenhouse-gas cuts from 20 percent in 2020 compared with 1990 levels. It aims to alleviate an excess of permits in the emissions-trading system, which swelled to more than 2.1 billion allowances last year, according to commission estimates.

Coupled with an economic crisis and inflows of cheaper imported emission credits, the glut helped drive the price of EU carbon allowances to a record low of 2.46 euros a ton in April. The supply of permits will be reduced if there is an accumulated surplus of at least 833 million metric tons, according to the market stability reserve proposal. If the surplus fell below 400 million tons, the EU would begin returning allowances to the market from the reserve.

Last Round

The draft measure, which would introduce automatic supply curbs or injections starting in 2021, has divided EU governments. During the last round of talks in April, some member states including Poland and Bulgaria argued that the proposal should be linked with continuing EU discussions about the 2030 climate and energy targets, according to people with knowledge of the matter. EU leaders aim to reach a political agreement on the 2030 framework in October.

A group of nations including Germany, Denmark and the U.K. signaled that they prefer the proposal to be dealt with independently and opt for a faster start of the reserve. German Environment Minister Barbara Hendricks, who prefers the introduction of the mechanism in 2016, said last month she sees “a lot of support” to strengthen the EU emissions trading system before 2020.

Pollution Caps

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 ($136) a ton. Emission permits for December rose 4.6 percent to 5.43 euros on the ICE Futures Europe exchange as of 1:17 p.m. in London today.

To be approved by member states, the draft stability reserve 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 procedure in which the measure is considered is called co-decision because it also involves the European Parliament. It typically takes between a year and two years from the moment the law is proposed until it becomes binding.

Possible Timing

The Parliament is yet to decide whether to resume talks on the measure in July, the first possible timing after elections in May, or whether to schedule them for September, after its summer recess in August. In one of the first steps in the work on the proposal the assembly will need to choose a new rapporteur, or a member that would oversee the draft law. The previous rapporteur, French member of the European People’s Party Sophie Auconie, was not re-elected.

The environment committee, which leads work on climate-related laws in the Parliament, will then draft a report on the proposal and its members will have the right to propose amendments. Once such a report has been approved in a vote, the committee may opt to mandate the rapporteur to start informal talks with governments on a compromise version of the proposal.

“We will have more clarity only after the new Parliament starts work on it,” Psychas said. “Member states will continue working on the proposal under the Italian presidency.”

Italy takes over the EU presidency from Greece on July 1.

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