Is Europe's carbon trading scheme merely hot air?Published by MAC on 2011-12-27
Using "the market" as a means to absolutely reduce global greenhouse gas emissions has long been criticised as "pie in the sky" (and not a particularly clean pie at that).
Now, in order to "prop up" carbon prices under the EU Emissions Trading Scheme (ETS), the European Parliament will auction some emissions permits which were earlier planned to be given away for free to carbon-intensive industries (notably power plants and steel producers).
On the face of it, this is a positive move and might lead to a more realistic pricing of the costs of continuing to pollute.
But there's plenty of scepticism about the proposal. Some investors and environmental groups claim that plans to increase energy efficiency in Europe would reduce demand for emissions permits and thus lower their price.
That would potentially undermine the "logic" behind the scheme. But then that's "the market" for you!
For background story, see: Carrying Carbon to Copenhagen: EU & UK
EU Lawmakers Back Plan To Withhold EU CO2 Permits
By Ben Garside and Nina Chestney
21 December 2011
European Union lawmakers backed a proposal on Tuesday to allow the EU Commission to prop up record low carbon prices by withholding 1.4 billion permits from the third phase of the EU Emissions Trading Scheme, sending prices 20 percent higher.
The majority of the members of the European Parliament's cross-party environment committee backed changes to an energy efficiency bill that could give the EU Commission the power to intervene in the carbon market it set up, after it misjudged the amount of permits EU industry needed to cover their emissions.
The EU ETS caps the emissions of some 11,000 factories and power plants in the bloc, forcing them to buy carbon permits to cover their emissions output.
The EU Commission, which oversees the scheme, over-estimated the amount of permits the EU's heavy emitters would need to cover their emissions in the period 2008-2012, resulting in over-supply.
The supply glut and concerns about the EU economy have driven prices for EU Allowances (EUAs) down by some 60 percent over the past six months to a record low of 6.30 euros last week.
To try and rectify the problem, the Commission will tighten the cap on emissions and auction the majority of permits in the third phase (2013-2020), instead of giving them away for free.
Investors and environmental groups renewed calls for intervention, however, saying plans for increased energy efficiency in the bloc would reduce demand for permits, putting more downward pressure on prices.
The vote is the first of three ballots that could lead to a cut of 8 percent in the supply of permits during the 2013-2020 trading phase.
Benchmark EUAs jumped as much as 30 percent by mid-morning before receding slightly to over 18 percent higher at 8.73 euros a tonne at 1232 GMT.
Many analysts were doubtful the rise would be sustained.
"The market is likely to read it as a bullish sign, though its effect is likely to fade away in few hours. We may rise today, but will that even last till Friday? I doubt it," said Matteo Mazzoni, an analyst at Nomisma Energia.
"There are lots of steps between this positive vote and to get this amendment endorsed at the EU level. Probably too many to take that as a realistic possibility."
Tuesday's draft text beefs up a Commission bill in June, which set non-binding energy reduction goals for all 27 member states of the EU but failed to address how the measure would impact the EU ETS.
There was clear majority on the committee to withhold what was described as a "significant number" of carbon permits from the market, while the specific number 1.4 billion was passed by just one vote.
"The 1.4 billion will not survive," German Christian Democrat Peter Liese told a news conference in Brussels after the vote.
Liese said there was support for intervening in the market going forward, particularly from Denmark, which takes over the rotating EU presidency from January 1.
"I am sure that the Danish presidency will work on it, and I am also sure that some member states will be supportive. It's in their interest to get more revenues," he said.
Danish Environment Minister Martin Lidegaard hinted on Monday that his country supports intervention to shore up carbon prices.
"There are different solutions, but it's too early to say (how this can be tackled), but we have to deal with it sooner or later," Lidegaard told reporters.
An amendment to cut overall supply was also passed.
The EC would reduce the number of permits available to auction from 2013 in order to withhold permits and reduce supply. Under current EU rules, the supply of carbon permits will be reduced by 1.74 percent per year from 2013 through 2020.
The parliament wants supply to be cut by 2.25 percent.
The committee's vote will be taken into consideration by the more senior industry committee of MEPs in January.
A full parliament ballot is expected around April, and all 27 national EU governments must agree to changes before they can become law.
($1 = 0.7682 euros)
(Additional reporting by Barbara Lewis; editing by James Jukwey and Jane Baird)