EU Carbon Fluctuates After Nations Agree to Seek 2021 Fix Start

European Union carbon permits fluctuated after governments agreed to seek a market fix starting in 2021, enabling the start of talks with the European Parliament next week.

Benchmark allowances in the world’s biggest emissions market erased losses after member states late Wednesday approved the mandate for talks on the final version of a draft law on a market stability reserve. The reserve would ease a glut of permits that led to a 75 percent drop in emission allowances since 2008 to levels that fail to deter industry from burning coal, the most-polluting fossil fuel.

The agreement includes a provision to transfer permits withheld from government auctions in 2014-2016 into the reserve, preventing their return to the market in 2019-2020, Latvia, which holds the EU’s rotating presidency, said in a statement. The postponed, or backloaded, allowances account for almost half of the average annual pollution limit in the bloc’s cap-and-trade carbon program.

“The decision takes away a large chunk of the concern that the legislative changes will be held up for a long time,” said Louis Redshaw, founder of Redshaw Advisors Ltd. in London, which buys and sells permits on behalf of factories. “This is a positive development for price.”

EU permits for delivery in December were down 0.2 percent to 7 euros ($7.64) a metric ton at 4:52 p.m. on the ICE Futures Europe exchange in London. The contracts dropped as much as 1.7 percent before advancing to a month-high 7.29 euros a ton.

Second Attempt

The compromise was reached in a second attempt after member states failed to adopt a negotiating mandate during the first part of their meeting. Carbon prices fell as much as 4.4 percent on Wednesday as a coalition led by the U.K. and Germany sought an early start of the fix in 2017 and an alliance headed by Poland opposed bringing the reform forward.

Germany is “still not satisfied” with the compromise, Environment Minister Barbara Hendricks said today in an e-mailed statement. The nation will make further efforts in Brussels to ensure the reserve is introduced as soon as possible, she said.

The draft law needs qualified-majority support from national governments and majority support by the European Parliament to be approved or amended. In its previous plan, Latvia sought nations’ approval for a start of the fix “no later than 2021,” a wording that could enable an earlier introduction and was objected to by the Poland-led alliance.

The group headed by the U.K. and Germany, which endorsed it beginning four years earlier than originally proposed by the European Commission, wanted to break the deadlock Wednesday and avoid delay in talks with the Parliament, according to two people with knowledge of the matter. They asked not to be identified because the meeting was private.

Unallocated Allowances

The reserve would automatically absorb carbon allowances in the EU emissions-trading system, or ETS, if the surplus exceeds a fixed limit, and release them to the market in the event of a shortage. The glut swelled to about 2.1 billion permits last year, according to EU estimates.

The first round of talks with the European Parliament is set to take place on March 30, according to the EU presidency.

The legislature’s environment committee voted in February to push for a start of the reserve by the end of 2018 in negotiations with governments. It recommended putting the backloaded permits into the reserve along with allowances that aren’t allocated in the 2013-2020 trading period of the ETS.

EU member states on Wednesday didn’t back the same treatment for unallocated allowances.

The deal includes a provision that would enable the commission to address the issue under the planned review of the ETS for the post-2020 period. The commission has said it planned to propose it shortly after the market stability reserve law has been adopted, signaling it aimed for presentation before the EU summer break that starts in August.

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