Carbon market slump worries policy makers

VILNIUS - The European Parliament approved a plan intended to reduce a record glut of permits and increase prices in the world’s biggest carbon market after they slumped to an all-time low, reports Bloomberg. European Union carbon allowances rose the most in two months after lawmakers in Strasbourg, France, endorsed a revised version of a plan known as backloading advanced by the European Commission, the region’s regulatory arm. That was the Parliament’s second verdict on the measure, which would delay the sale of some permits to support prices after it blocked the plan in April, triggering a 45 percent slump.

“It’s a good signal that Parliament voted this through today,” Oeystein Loeseth, chief executive officer of Vattenfall, Europe’s biggest emitter after RWE, said by telephone. “When you take volumes out of the market, prices will increase.”
Emissions prices in the $72 billion cap-and-trade program have lost more than 70 percent in the past four years. The euro area’s record-long recession reduced demand for pollution rights and worsened a glut that swelled to about 2 billion metric tons in 2012, according to the EU. That’s almost equal to the region’s annual limit imposed on 12,000 power plants and factories. The caps were set before the financial crisis.

EU allowances for delivery in December gained 9.3 percent, the biggest jump since May 3, to close at 4.69 euros a ton on the ICE Futures Europe exchange, after falling on July 3 by as much as 24 percent before the vote. The contract slumped to a record 2.46 euros on April 17, the day after the Parliament blocked the emergency fix in its first plenary vote.
Lawmakers endorsed the plan 344 to 311, with 46 abstentions, according to the voting result.

“The backloading plan has passed its largest hurdle so far, but auction curbs are still far from certain and unlikely to start before mid-2014,” Itamar Orlandi, an analyst at Bloomberg New Energy Finance in London, said on July 3 by e-mail. “The focus will now shift from Strasbourg to Berlin, as Germany’s decision on the plan will determine whether it can go ahead.”

Traders will now focus on positions of national governments, whose consent is also needed to enact the plan, according to Ingo Ramming, co-head of commodity solutions at Commerzbank in London.
“Markets are hoping on a fast-track decision to regain confidence in the EU emissions trading scheme,” he said July 3 by e-mail. “We would expect that prices are capped in the mid-term around 6 euros on the back of uncertainties on the European economy, supply from industrials and auctioning.”

Permits may rise to 5.20 euros after the approval, according to the median forecast of nine analysts and traders surveyed by Bloomberg News before the vote.
The assembly rejected amendments seeking an earlier return of the delayed permits to the market and earmarking 600 million allowances for a special fund to promote low-emissions technology. It backed a proposal to cap backloading at 900 million permits and limit the planned intervention in the carbon market to an exceptional, one-time move. The delay in sales of permits may be enacted under the condition that it has “no significant impact” on companies prone to relocating production to regions without emission curbs, lawmakers decided.

“This is more bullish than the market had anticipated,” Konrad Hanschmidt, an analyst at BNEF, said on July 3 by e-mail.
The backloading strategy has divided policy makers and industry. Opponents of the fix, ranging from Poland to steelmaker ArcelorMittal, say it pushes up energy costs during an economic slump. The EU commission and companies including Royal Dutch Shell say intervention is needed to bolster prices that are too low to stimulate investment in clean technology.

“Yes!” EU Climate Commissioner Connie Hedegaard said on her Twitter Inc. account. “Despite heavy-handed lobbying, and after very substantial debate, the European Parliament supports the backloading proposal.”
The decision in favor of backloading on July 3 authorizes Matthias Groote, the lawmaker overseeing the measure in the Parliament, to start talks with representatives of national governments on the final wording of the legislation in a fast-track procedure. The outcome of the talks will need official approval by the Parliament and EU ministers.
Lithuania, which holds the EU rotating presidency and will represent member states in the negotiations, is ready for a “constructive dialog” on the carbon fix, the Baltic country’s Environment Minister Valentinas Mazuronis said in an e-mailed statement. He said he was confident the measure can be dealt with “effectively and expeditiously.”

The Parliament’s decision to block the faster return of permits to the market and the creation of the innovation fund will make talks with member states easier, Peter Liese, a German Christian Democrat member of the Parliament, said after the vote.

“It’ll go very fast after the German elections,” he said in an interview.
Member states may decide about their position by “early fall,” according to Arunas Vinciunas, Lithuania’s Deputy Permanent Representative to the EU. While most EU countries favor backloading, they are short of the qualified majority needed to approve the proposal because several nations, including Germany, remain undecided. Chancellor Angela Merkel said in May she hoped that Europe’s biggest economy would be able to tackle the plan soon after elections on Sept. 22.

“It is crucial to get structural reforms quickly off the ground to ensure the emissions trading system will be sustainable and predictable,” Bernhard Guenther, chief financial officer of RWE, said on July 3 in an interview. “We need to know what the political framework for investments in 2020 and ahead will look like and which climate and reduction targets have to be achieved.”