European Union emission permits dropped, erasing most of Monday's gains, after the region's regulator proposed to delay sales of 900 million allowances to curb an oversupply in the world's biggest carbon market.
Permits for December slid as much as 8.9 per cent, their biggest drop since July 18, after gaining 9 per cent yesterday on the ICE Futures Europe exchange in London. The European Commission is seeking to postpone sales during the three years through 2015 to the last two years of the next trading phase, which ends in 2020, according to a draft document published yesterday on an EU website.
Carbon permits for December sank to a record in April, losing 83 per cent since peaking in 2008, as the region's financial crisis cut demand from polluters. The glut of permits next year may be as much as 2 billion metric tons, or about a year's supply in Europe's trading system, according to a draft EU document obtained by Bloomberg News in October. The commission plans to publish a report tomorrow setting out permanent changes to the program to meet its 2050 pollution- reduction target.
The regulator may be forced to soften its plan because of opposition from some countries, according to Deutsche Bank.
“Given the opposition to this proposal that exists in some quarters, the risk is that this time frame is over-optimistic, and the 900 million number proposed by the commission may be subject to revision in the negotiations that will now follow,” Mark Lewis, an analyst for the bank in Paris, said today in an e-mailed report. Should it be mandated, permits may rise above 15 euros a ton in the following 18 months, he said. The plan will not be approved before April at the earliest, he said.
The allowances fell 7.3 per cent to 8.42 euros ($10) a ton at 3:57 p.m. in London. They closed above 9 euros for the first time since March on Monday.
The number of permits to be delayed under the strategy known as backloading, is at the higher side of a range floated by the commission in July, when it presented an outline of the short-term plan to improve the world's biggest cap-and-trade market. The options drafted at the time were postponing 400 million, 900 million and 1.2 billion allowances.
“This is a very dangerous proposal where the commission plays with fire,” Per Lekander, UBS's global head of utilities research in Paris, said yesterday by e-mail. “This could drive the price very high and then it crashes. Here, there is no genuine scarcity.”
Under the plan, 400 million tons may be removed from next year's supply, more than the 300 million tons in 2014 and 200 million tons in 2015, according to Paolo Coghe, an analyst at Societe Generale SA in Paris.
“Between now and the end of the year there will be a very substantial amount of auctions to keep the market well supplied,” Coghe said today in an e-mailed note.
Between now and the end of the year there will be a very substantial amount of auctions to keep the market well supplied
The draft measure needs qualified-majority support from national governments to become law. Its formal adoption, which also requires a three-month review by member states and the European Parliament, will take place only after the parliament votes on a separate law change to reassert the commission's right to decide about the timing of auctions, Climate Commissioner Connie Hedegaard said Monday in Brussels. The parliament is tentatively scheduled to vote on the legislative amendment in April.
“The figure of 900 million allowances has been put forward in the light of views expressed by member states,” the regulator said. It had planned to publish the proposal tomorrow.
Hedegaard has said the commission was aiming for a decision on the backloading plan before the end of this year. Representatives of national governments in the EU Climate Change Committee are scheduled to discuss the measure at their next meeting on November 15 and may hold a vote in December, according to a senior EU official, who declined to be named, quoting policy.
Emission prices may climb to 15 euros a ton in the three years starting in 2013, according to assumptions used by the commission to assess costs to industry.
Assuming non-utility emitters receive 704 million tons of free allowances, they may need to buy an additional 84 million tons of allowances in the three years through 2015, the commission said in an impact statement. That would cost 840 million euros at 10 euros a ton.
In the four years through 2011, most industries in the program had surpluses, including “iron and steel” with 69 per cent of its emissions and “pulp and paper” with 35 per cent, according to the impact statement. While some emitters will have sold allowances, every 1 euro a ton of price gain will increase the value of surplus permits held by non-power companies by at least 704 million euros, the commission said.