EU carbon prices dive after market fix delayed

Carbon prices plunged the most in more than three weeks after the European Parliament's environment committee postponed a decision to seek fast-track approval for a plan to fix a record surplus of emission permits.

The panel backed in a non-binding vote a compromise proposal to reduce the supply of European Union carbon permits, though a separate decision on authorising its chairman to start talks with member states was delayed until the committee's next meeting on February 25 and February 26. EU carbon futures for December fell as much as 20 per cent.

“We don't have clarity about what the next move will be,” Sarah Deblock, director of EU policy at the International Emissions Trading Association in Brussels, said in an interview. The vote was “a good first step and a strong political signal about the environment committee's support.”

At stake is the EU's 54 billion-euro ($70 billion) cap-and- trade system, which imposes emission limits on about 12,000 power plants and factories owned by companies from EON SE, Germany's largest utility, to steelmaker ArcelorMittal. The aim of the glut-fix plan is to help support the price of carbon permits, which slumped to 2.81 euros a metric ton last month from more than 10 euros a year ago as Europe's sputtering economy damped demand.

EU carbon for December fell to as low as 4.09 euros a ton on ICE Futures Europe exchange in London. The contract closed at 4.68 euros a ton.

Auction change


The proposed change to the emissions-trading law makes explicit the European Commission's right to alter the schedule of carbon auctions. The committee, whose verdict is a recommendation for the full 754-seat EU Parliament, also set conditions for such market intervention.

The environment committee approved the proposal with 38 votes in favor, 25 against and two abstentions. The plan still requires approval by the whole parliament in a vote tentatively scheduled for April and by national governments.

The proposal passed “with a rather thin margin,” Per Lekander, a Paris-based analyst at UBS AG, wrote in a note. “With today's weak support, we see further delays as likely.”

Others analysts saw the vote margin as being better than expected, including Matthew Gray at Jefferies Group Inc. and Deutsche Bank AG's Alexander Karnick and James Brand.

Backload strategy

The proposal opens the way for a separate measure to delay sales of 900 million carbon permits over the next three years, which would be returned to the market in 2019-2020 in a strategy known as backloading. The commission, the EU's regulatory arm, requested the intervention right last year.

The EU introduced its carbon system in 2005 to help meet emission-reduction targets under the 1997 Kyoto Protocol. The program issues allowances to factories and utilities, which must surrender enough permits to cover their discharges of carbon dioxide or face fines.

The supply glut may exceed 1.5 billion tons by the end of 2013, Jos Debelke, the commission's director general for climate, said February 6. The surplus may swell to about 2 billion tons by 2020, he said.

Representatives of political groups on the committee, including Peter Liese from the European People's Party and Chris Davies from the pro-business Liberals, said the panel needed more time to discuss a mandate for its chairman to hold direct talks with member states.

Fast-track talks

A fast-track negotiating agreement between national governments and Parliament would limit the number of times the full assembly would have to be consulted. Otherwise, the whole Parliament would vote first on the environment committee's position before talks take place between the assembly and states, known as a trilogue. That may delay a final verdict.

The backloading proposal is short of a qualified majority among member states because some, including Germany, remain undecided, three EU officials with knowledge of the matter said last month. Votes in Europe's qualified-majority system for national governments are weighted by each country's size.

Chancellor Angela Merkel is following the debate “with interest” and Germany “will have a common position when a decision is necessary at the European level,” Steffen Seibert, a government spokesman, said at a Berlin news conference today.

Matthias Groote, the environment panel's chairman, said an increasing number of Parliament members realise there is no alternative to the emissions-trading system, or the ETS.

“I want to bring all colleagues on board,” Groote said in an interview after the vote in Brussels. “It is not a hot potato, it's a democratic question and I want to bring it to success.”

Divided opinion

The backloading plan has divided Parliament members, governments and industry. Its supporters, including Royal Dutch Shell Plc, say current prices are too low to spur low-carbon investment. Poland, which leads the group of opponents, says that the plan amounts to “market manipulation.”

Backloading is a stop-gap measure to support prices, and will be followed by a “structural” overhaul of the cap-and- trade program that was outlined by the commission in November.

“Without the mandate, there's no certainty when talks with member states will start and how long the whole legislative process will take,” IETA's Deblock said. “Members of Parliament should endorse the start of trilogue negotiations next week for the backloading proposal to move forward and for the debate to focus on structural measures for the EU ETS.”