EU moves to prop up carbon allowances

July 27, 2012 at 6:30 AM
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BRUSSELS, July 27 (UPI) -- The European Commission moved this week to prop up the ailing price of carbon emissions allowances by cutting the amount of allowances due to be auctioned.

EU Climate Action Commissioner Connie Hedegaard said in a statement that the commission had decided to postpone, or "backload," a portion of the EU Emissions Trading Scheme auction volume scheduled for the next three years into the period after 2015.

The move was made after the financial crisis and resulting economic slump caused European industrial activity to slow, dampening demand for the allowances.

That, in turn, has caused the formation of surpluses, sending prices for the carbon allowances tumbling well below the level needed to persuade industrial buyers to reduce greenhouse gas emissions.

"The EU ETS has a growing surplus of allowances built up over the last few years. It is not wise to deliberately continue to flood a market that is already oversupplied," Hedegaard said, adding, "This short-term measure will improve the functioning of the market."

It was unclear, however, how many allowances would be taken out of the upcoming auction for "Phase 3" of the trading scheme, which is to cover the 2013-20 period. That will be determined through negotiations between the Commission, the European Parliament and member states.

The EP -- echoing the position of environmentalists -- in March approved a measure supporting intervention in the carbon market beginning with the 2013-20 phase, calling for a "necessary amount of allowances" to be removed to strengthen languishing open-market prices, which have fallen from a peak of $40 per ton of carbon equivalent in 2008 to $8.31 Wednesday.

Analysts say a price of $30-$50 per ton is necessary to prompt polluters to invest in greenhouse gas-reducing measures.

The idea of backloading allowances is vehemently opposed by industrial users who don't want previous investments devalued by market manipulation.

"If the political will is there, all the necessary decisions can be taken before the next auctioning phase starts at the beginning of 2013," Hedegaard said. "Now it is up to the European Parliament and member states to deliver."

About 163 million excess carbon allowances were issued in 2011, adding to an unused stockpile of 279 million unused credits held by the steel industry and 195 million issued to cement makers, the British environmental group Sandbag said.

The commission provided three scenarios on how many allowances could be postponed until after 2015 -- 400 million, 900 million or 1.2 billion -- but made no concrete recommendation, London energy analysts ICIS Heren reported.

"We hope the commission will move to withhold a quantity of allowances commensurate with the crisis facing the scheme: our research finds that 2.2 billion allowances need to be removed to restore the scarcity envisaged before the recession," Sandbag senior policy adviser Damien Morris said.

Leading Green Party MEP Bas Eickhout of the Netherlands said the commission's proposal didn't go far enough to save the ETS, reflecting "internal wrangling" within the body over its fate.

"The emissions trading scheme is in need of serious surgery to address the current problems with the carbon market and ensure it can fulfill its purpose of delivering emissions reductions in the EU," he said.

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