EU mulls new options to beef up carbon price

The European Commission is working on a series of reforms designed to permanently correct the over-supply of carbon allowances in the EU’s emissions trading scheme, which has led to record low carbon prices and undermined investment in clean technologies.

A draft European Commission report obtained yesterday by both the Bloomberg and Reuters news agencies, argues the EU will have to build on current plans to curb the number of new emission allowances to be auctioned from next year and deliver wider changes to the market that “more profoundly and permanently [address] the balance between supply and demand”, Financial Director’s sister publication BusinessGreen.com reports. 

The report, which is expected to be released next month, urges the EU’s climate change committee to finalise plans to withhold the auctioning of carbon credits before the end of the year “in order to provide certainty for market participants”.

But it also sets out six separate proposals designed to provide a permanent fix to the over-supply that has dogged the market.

The options proposed include reducing the EU’s over-arching emissions reduction target for 2020 from 20 to 30 per cent or cancelling additional EU allowances during the next phase of the scheme, although both proposals would struggle to secure the support from all member states that will be necessary to fundamentally change the rules governing the market.

Alternatively, the report sets out plans to increase the pace of emission reductions required of companies covered by the ETS from the current annual cuts of 1.74 per cent, effectively increasing demand for carbon allowances.

More wide-ranging still, the report also proposes introducing a carbon floor price or price management reserve to tackle any “excessive price decrease”, expanding the ETS to cover more industries when phase four of the scheme comes into effect in 2020, and placing tighter limits on the number of international carbon offsets that can be imported into the European carbon market.

The report raises the prospect of a larger numbers of energy intensive companies being required to purchase carbon allowances, potentially driving up energy costs and providing an increased incentive for investment in energy efficiency measures.

The news also led to a further drop in the price of UN-backed certified emission reduction carbon offsets, which fell 7.8 per cent to a record low of €1.19 this morning amidst speculation that the EU proposals could further restrict European demand for offsets.

Separately, the Climate Markets and Investment Assiation yesterday welcomed reports the European Council is to meet later this week to consider proposals to “backload” carbon allowance auctions in order to address the surplus in the market.

“The EU must as a matter of urgency act to address the ongoing surplus of EUAs that has accumulated,” the group said in a statement. “Some analysts have projected that, because of the surplus, no emissions reductions need to take place in Europe until at least 2020. We therefore fully support action to hold back EUAs from auction.”

However, it also called for further action to tackle the “fundamental flaw in the design of the EU ETS that led to the surplus and could lead to future surpluses”.

“This can only be done by the institution of a clear set of rules that will withhold and cancel EUAs under pre-defined circumstances,” the group said. “CMIA is of the opinion that if a surplus has been present for 3 years then this is no longer a temporary effect and would need to be addressed to realign the volume of EUAs with that which the annually declining cap dictates.”