First steps towards stabilising carbon market
By Anne Eckstein | Wednesday 25 July 2012
The European Commission, respecting its pledge to the Council of last April (see
Europolitics4410), presented, on 25 July, a package of three documents
(1) aimed at strengthening the carbon market and, in the final analysis, raising the price of carbon.
The first is a Commission draft regulation modifying the 2013-2020 calendar for auctions of emission allowances under the EU’s Emission Trading Scheme (ETS). The second is a draft decision of the Council and European Parliament spelling out the Commission’s powers to adopt this type of amendment to the regulation on auctions of emission allowances. The third is a working document that analyses the functioning of the ETS and proposes three options for its long-term improvement.
“The EU’s 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,” declared Climate Action Commissioner Connie Hedegaard, justifying the proposals. By changing the timing of auctions, the Commission hopes to shrink the surplus, stabilise the market and push up the price of CO
2 per tonne. “We are paving the way to changing the timing of when allowances are auctioned, a short-term measure that will improve the functioning of the ETS. If the political will is there, all the necessary decisions can be taken before the next auctioning phase starts at the beginning of 2013,” said the commissioner.
LIMITING VOLUME OF ALLOWANCES
The Commission’s draft regulation reduces the volume of allowances auctioned during the first three years of the third ETS implementation period (2013-2015), without changing the total volume of allowances planned to 2015 – 3.5 billion (including those granted to the aviation sector and the RNE300 programme but not including the free allowances that certain transition member states can allocate for electricity generation) – of the 8.5 billion allowances to be allocated throughout the period of 2013-2020. In terms of volumes of allowances not put up for sale (or “frozen”), the Commission proposes 400 million, 900 million or 1,200 million allowances: the decision will depend on the opinions and/or preferences expressed by Parliament and the member states.
“Once the member states and Parliament have sent us their observations, the Commission will present to the Climate Change Committee a proposal in due form for a draft regulation that will include a calendar for 2013-2020 and the volumes of allowances that can be sold per year,” said Commission spokesman Isaac Valero Ladron, who thus sends the ball back into the court of the other two institutions in terms of the “urgency” of a final decision. When the committee has adopted its decision, Parliament and the Council will have three months to raise any objections. No formal decision is expected before the end of the year, although considering the extremely low price of a tonne of CO
2 (around €7.9 per tonne), certain industrial sectors have stressed the urgency of the situation if the EU hopes to save the ETS.
The calendar and other practical arrangements for managing the auctioning of greenhouse gas emission allowances are defined by Commission Regulation 1031/2010 of 12 November 2010. The Commission explains that this illustrates the legislator’s will to establish some degree of flexibility in decision making and leeway and adaptability with respect to the market. This regulation establishes a calendar and the volume of quotas to be auctioned each year after deducting allowances allocated for free. The Commission notes, however, that in the context of the debate on possible actions to improve the balance between supply and demand for allowances, differences of interpretation by certain stakeholders have emerged with regard to the Commission’s powers to act in this respect. The draft Council and EP decision presented by the Commission (second document of the package) therefore aims to clarify the situation so as to “eliminate any doubts about its competences and ensure the legal security of the measures it will adopt in the future”.
ANALYSIS AND OUTLOOK FOR ETS
In its 2010 communication on possibilities of increasing the target for reducing greenhouse gas emissions beyond 20% and on the risk of carbon leakage, the Commission considered the option of surplus allowances for 2008-2012 (excluding the use of international credits obtained under the Kyoto mechanisms) of some 5% to 8% of total allowances (500 to 900 million). It states in the third document presented on 25 July that, in 2011, there were already 406 million unused allowances (excluding international credits; 955 million if these credits are added). If surpluses increase in 2012 at the same rate as in 2011, the total volume of surpluses at the end of phase two of the ETS (end 2012) would reach 1.4 billion or more, observes the Commission, especially considering the low price of carbon and the economic crisis.
The Commission proposes in this working document three options for changing the auctioning system for phase three of the ETS (2013-2020) and presents an evaluation of the impact on the market and on enterprises in terms of whether there is a large, medium or small change in the system. Once it has consulted member states, the EP and stakeholders on this document, it will draw up a more precise proposal, in principle by the end of the year.
“It is not wise to deliberately continue to flood a market that is already oversupplied” (1) The documents are available at ec.europa.eu/clima/policies/ets/auctioning/third/documentation_en.htm