EU Carbon Surges as Lawmakers Mull Ways to Strengthen Market

  • EU lead lawmaker says he's open to ideas how to boost prices
  • Market supported by French President's comments on price floor

The price of emitting greenhouse gases in the European Union jumped to the highest in more than three months as politicians floated new plans to strengthen the world’s biggest cap-and-trade program.

Ian Duncan, the European Parliament’s lead lawmaker on a reform of the EU emissions-trading system, outlined a plan on Tuesday under which the assembly has an option to push for accelerated carbon reductions after 2020. French President Francois Hollande said that the nation would unilaterally commit to a minimum price for emission allowances and close some nuclear reactors from 2018.

Carbon prices rose as much as 6.8 percent to 7.07 euros a metric ton on the ICE Futures Europe exchange on Wednesday, extending their gains to almost 19 percent over two days. The benchmark contract for delivery in December traded 4.5 percent up at 6.92 euros as of 1:46 p.m. in London, the highest level since Jan. 14.

“I am open to all suggestions of how we strengthen our carbon market while at the same time protecting against the risk” of businesses moving to regions without pollution curbs, Duncan said by e-mail on Wednesday. An options paper he presented to representatives of political parties in the European Parliament’s environment committee “outlines a number of options on key parts of the reform, including on ambition.”

The EU emissions program is Europe’s flagship policy tool to reduce greenhouse gases blamed for climate change. It imposes decreasing pollution caps on about 12,000 installations owned by manufacturers and utilities. The carbon price slumped by more than 70 percent in the past eight years as an economic crisis cut industrial output and inflated a glut of allowances.

“There seems to be a growing number of countries dissatisfied with the low EU allowance price,” Espen Andreassen, a carbon analyst for Markedskraft ASA, said by phone. Proposals to deal with oversupply in the market are probably helping drive prices higher, as well as the yearly compliance deadline on April 30, he said.

EU carbon allowances rose in tandem with German 2017 power prices, which surged a record 5.1 percent on Wednesday. Crude oil is up 18 percent this month, the most since April last year. Summer 2017 U.K. natural gas has advanced a record 15 percent in April.

“The competitiveness of gas compared with coal is weakening. That’s always somewhat bullish for the carbon market,” Andreassen said. “All commodity markets are surging and China is a reason for that.”

Representatives of political groups in the EU Parliament’s environment committee will weigh an option to propose increasing the pace of greenhouse-gas cuts to 2.4 percent or 2.6 percent a year after 2020, according to the document presented by Duncan. That compares with 2.2 percent put forward by the European Commission, the bloc’s regulatory arm, following endorsement by EU heads of governments.

Options Paper

An increase of the so-called linear reduction factor to 2.4 percent would “bring us in line with the lower end of our 2050 decarbonization target” of between 80 percent and 95 percent, Duncan said in his options paper presented to representatives of political groups, also known as shadow rapporteurs. Elevating the factor further to 2.6 percent would bring the EU in line with the upper end of the political target for mid-century, he said.

The options paper aims to “ascertain the preferences of shadow rapporteurs and political groups on the critical design structure of the reform.” They have until May 6 to respond, indicating preferences based on the balance of opinion in their political groups.

Even after the surge that started on Tuesday, EU allowances are 16 percent down this year. It was the fall of prices at the beginning of this year, combined with growing global support for carbon pricing, that triggered discussions in Europe on carbon floors, "soft collars" and stepping up climate ambition, according to Ingo Ramming, London-based co-head of commodity solutions for Commerzbank AG. At the same time EU policy makers pay close attention to the impact of higher prices and to the need for free permits to manufacturers prone to moving production outside Europe, he said.

“It is difficult to see in this environment a political consensus and a fast track agreement to increase the linear reduction factor above what was agreed by EU leaders in 2014,” he said.

The European Parliament and its 28 member states started legislative work last year on a draft law to adjust the EU ETS to a tougher emission-reduction target for 2030. To be approved or amended, it needs majority backing by the assembly and qualified majority support from national governments.

In the legislative process, Duncan, a British member of the European Parliament from the Conservative group, is tasked with drafting a report in the environment committee, which leads work on the EU ETS reform in the assembly. After a vote on the report in the committee his responsibilities will also include representing the Parliament in negotiations with member states and steering the reform through a plenary vote.

France’s Hollande seeks to shut some nuclear stations to help reduce his country’s dependence on nuclear power in favor of renewable energy. Environment Minister Segolene Royal has pushed for a carbon price corridor in the EU ETS but her pitch hasn’t attracted much attention from other member states so far, according to two people with knowledge of the talks among government representatives on the draft reform.

“France must show the way, it will unilaterally commit to give carbon a floor price” and propose a price corridor for Europe’s market, Hollande said in a speech on Monday, adding that details will follow this year.

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