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Europe Votes To Rescue Emissions Trading Scheme

Europe’s Parliament voted today to implement a short-term solution to the oversupply in its carbon market, which has been dragging down its troubled Emissions Trading Scheme (ETS).

The European Commission (EC)’s proposal for backloading, or the temporary withholding of 900 million carbon emission allowances due to come to market between 2013 and 2015, was passed by a vote of 344-311.

The positive result was unexpected after a first proposal was rejected in April. Marcus Ferdinand, senior market analyst with Thomson Reuters Point Carbon (TRPC), told REW that “The market was surprised by how clear the majority was – we did not expect a clear statement by the Parliament. This is the best-case outcome that today could have delivered.”

But carbon price reductions are unlikely to begin before mid-2014, and it is far from certain that backloading will be a success. A legislative proposal to deliver structural reforms to the ETS is due by the end of this year. Much will depend on what positions crucial undecided Member States such as Germany decide to take.

Launched in 2005, the ETS was expected to deliver 2.8 billion tonnes of carbon reductions by 2020 through a carbon cap and the trading of emissions permits. Industry was given an initial number of permits based on economic conditions at the time – but the global recession brought a downturn in production, mooting original market conditions. Now the market is oversupplied, with an estimated surplus of two billion allowances and the price of carbon plummeting from an originally anticipated €20-€30 per tonne to a record low of €2.63 per tonne after April’s “no” vote. Prices currently hover around €4 per tonne.

While backloading will help ease the short-term crisis, it is not a long-term solution. “Today’s vote doesn’t permanently remove any carbon allowances,” Ferdinand cautioned. “It will most likely have a short-term bullish effect on prices, but the general status [of the ETS] won’t change. Even removing 900 million allowances would not make the market short; there is still an oversupply of around one gigatonne,” he said. And he noted that the vote “hasn’t really changed our price expectation: we still think the market, on average, will turn out in single digits within Phase Three – and not high single digits.” TRPC’s carbon price forecast is currently €6.50 on average for the Phase Three period (2013-2020).

Ferdinand continued, “Even though we have seen support from Parliament, which we should see as a signal of political goodwill to save the market, it is only a first step toward strengthening the market and will have to be followed by more stringent structural measures and a substantive debate on 2030 targets.”

Others have also called for structural reform. “The backloading debate must serve as a stepping stone to a separate decision to permanently cancel at least 1.7 billion allowances,” said Damien Morris of UK-based carbon activist organisation Sandbag in a statement. The Green Party is also calling for the EC to cancel at least 1.4 billion allowances.

TRPC reported today that carbon prices rallied 45 percent from the day's low to a high of €4.71 after the vote.

Lead image: European Parliament via Shutterstock

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