UPDATE 2-European Parliament votes to cut carbon permit supply

Tue Dec 10, 2013 2:29pm GMT

(Adds confirmation of EU Council agenda in paragraph 3)

By Ben Garside

STRASBOURG, France Dec 10 (Reuters) - The European Parliament voted on Tuesday to remove surplus permits from the carbon market from next year to prop up allowance prices on the EU Emissions Trading Scheme (ETS), ending months of argument over the plan.

The full assembly voted in Strasbourg, France, to approve without further changes a step known as backloading, which will allow regulators to make a one-off delay to scheduled sales of 900 million carbon permits.

The bill is set to be formally signed off by the European Council of member states at a meeting on Dec. 16 and will require no further discussion by ministers following an informal agreement last month, an EU diplomat close to the process said on Tuesday.

The benchmark December 2013 EU Allowance futures fell to an intraday low of 4.73 euros following Tuesday's ballot, before climbing back to Monday's settlement level of 4.90 euros.

Analysts had expected a dip following the ballot as prices had risen in the past week in anticipation the plan would be adopted.

The European Commission wants to intervene in the market to lift carbon prices to a level that prompts companies to cut their greenhouse gas emissions, for example by investing in energy efficiency or switching to renewable energy sources.

The EU recession has cut the bloc's emissions, resulting in a massive oversupply of permits in the ETS that caused carbon prices to tumble below 5 euros from more than 30 euros in 2008.

Analysts predict prices could at least double due to backloading, but expect it will be years before they rise above the 20-euro level needed to prompt industry and utilities to invest in greener energy.

Some lawmakers believe the bloc's carbon market will be irrelevant without further reform.

"It's clear that backloading is not enough. The market is still oversupplied by 2 billion permits, but this buys us time to have a discussion on how to reform it," said Matthias Groote, the German Socialist lawmaker who steered the legislation through parliament.

Still, the proposal caused fierce divisions within member states, national governments and the European Parliament over fears it will push up energy prices and dent economic growth.

Following approval of the plan by EU ministers next week, member state officials will still need to agree exactly how and when the permits can be withdrawn from scheduled sales.

Officials are due to discuss options on Wednesday, but are not likely to vote on them until January or February.

"We expect some upside to EU Allowance prices in the coming months as the implementation of the measure becomes more concrete," said Marcus Ferdinand, an analyst at Thomson Reuters Point Carbon.

"Assuming the first allowances will be withheld from the market in the second half of 2014, we forecast the Dec-14 carbon price will increase by 35 percent compared to this years' (mean) price, to an average of 6 euros," he said in an emailed statement following the vote.

The European Commission proposed backloading as a limited first step to rescue the ETS, its flagship tool to curb emissions of heat-trapping gases blamed for climate change.

In January, the Commission will publish a legislative proposal on deeper ETS reforms, a well-placed EU source told Reuters last month. (Additional reporting by Michael Szabo; Editing by Dale Hudson and Jason Neely)