EU Carbon Still to Overcome Dilution Risk: Vattenfall

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Europe’s carbon market remains at risk of being undermined by costly renewable-energy subsidies through 2030 even after Tuesday’s accord on a plan to curb a surplus of emission permits, according to Vattenfall AB.

The draft decision by lawmakers to advance the start of a proposed permit reserve by two years to 2019 is only the first step in rebuilding the market’s credibility, said Stefan Dohler, head of markets at Solna, Sweden-based Vattenfall, the largest Nordic utility. While the accord will prevent a year’s worth of surplus permits from hitting the market by 2020, follow-up laws are needed to protect the system for the next 15 years, he said.

“The market stability reserve is important, but not the only solution for reaching the 2030 target,” Dohler said Wednesday by telephone. “You need the path, and you need to know what role the emissions-trading system plays in the whole framework.”

EU carbon allowances have plunged 76 percent from 2006’s record high after overlapping climate policies and the bloc’s recession eroded demand. Tuesday’s agreement on the reserve culminated four years of policy-making.

“There’s a very fast impact of around 2 billion tons that will now not hit the market,” Dohler said. “It will be basically taken away. The market stability reserve is a very important stone in the wall, but the wall is not complete yet.”

10-Week High

EU benchmark carbon allowances fell 1.5 percent to 7.46 euros ($8.42) a metric ton on the ICE Futures Europe exchange in London at 4:59 p.m. Prices reached 7.75 euros Wednesday, the highest for 10 weeks.

The European Commission will now focus on preparing a post-2020 overhaul of the market and plans to present it before the summer break in August, EU Climate and Energy Commissioner Miguel Arias Canete said May 5 on Twitter.

Traders in the program need to know whether the bloc will legislate to steepen the declining trajectory of the carbon cap to 2.2 percent after 2020 from 1.7 percent now, according to Vattenfall’s Dohler. The region is seeking to cut emissions by 40 percent by 2030 compared with 1990 levels.

“There are many ways to reach the 40 percent target, and the question is how much of that finds its way into the emissions trading system,” he said. “We’ve always said the ETS should be the leading instrument.”

Still, there are “good reasons” to introduce renewable policies and a chance remains that the carbon market will be diluted by measures governing industries it doesn’t cover now, such as transportation and agriculture, Dohler said.