(The author is a Reuters market analyst. The views expressed
are his own.)
By Gerard Wynn
LONDON, April 16 The European carbon market will
bounce back from the rejection by the European Parliament on
Tuesday of a proposal to skim off surplus allowances which have
smothered the market as a result of the financial crisis.
The market works by issuing factories and power plants a
fixed quota of EU allowances (EUAs). A surplus of these has cut
demand and seen carbon prices fall by more than 90 percent
compared with all-time highs.
The European Parliament rejected a so-called back-loading
proposal which would have delayed the sale of some 900 million
EUAs from 2013-2015, or about half of annual carbon emissions
under the scheme.
The Parliament's 315-334 rejection is probably the death of
that proposal, but not the market.
The European Commission's back-loading proposal was step one
in a long process to permanently remove the surplus EUAs.
It threatened to destabilise the market for two to three
years as the market tried to follow each twist and turn in that
approval process involving the Commission, Parliament and EU
member states, with no guarantee of success.
Reform proposals will now shift away from the short-term
when it could be argued the EU has bigger political priorities
than hiking carbon and power prices, to right its flagging
It is time that the Commission combined proposals for an
ambitious 2030 EU-wide carbon emissions cap with reform of the
carbon market for a coherent climate policy which looks beyond
the present economic crisis.
The Commission responded to the Parliament's rejection by
saying that it continued to support the back-loading proposal,
preferring more clarity on the position of the Council of 27 EU
member states before letting it die.
"The Commission remains convinced that back-loading would
help restore confidence in the EU ETS in the short term until we
decide on more structural measures," said Climate Commissioner
"We will now reflect on the next steps to ensure that Europe
has strong EU ETS (emissions trading scheme). In doing so the
Council's position on the proposal will be an important factor
and I take note of the Irish Presidency's reaction today to
urgently pursue and conclude discussions among Member States."
Little or no further reputation damage will be inflicted
upon the market from a further period of hiatus while the
Commission clarifies the Council position.
However the proposal is now badly damaged below the
water-line and will probably die.
This probably also fatally wounds the next stage of deeper,
so-called "structural measures", where the Commission published
options in November.
These were supposed to be step two, after the EU had
approved temporarily withholding some EUAs.
The Commission's preferred option was probably to cancel
permanently some of those EUAs, but it listed five other
options, all applied to the present trading cycle from
Those other five options were to: tighten the existing
EU-wide carbon cap in 2020; make steeper annual cuts in EUAs
under the scheme; bring more economic sectors into the scheme;
limit access to international offsets; or introduce a carbon
The Parliament on Tuesday rejected a lighter version of all
these, merely to withhold EUAs temporarily.
More ambitious structural measures also appear off the table
Chart 1: link.reuters.com/cuk66t
Chart 2: link.reuters.com/duk66t
But there is an option which will see prices rise again
before the end of the present trading cycle.
It is remarkable that the Commission has not yet linked
reform of the carbon market to its parallel efforts to agree a
new EU-wide carbon emissions target in 2030.
It made no mention of the year 2030 in its review of EU ETS
structural measures, published in November, "Report from the
Commission to the European Parliament and the Council: The state
of the European carbon market in 2012".
And it kicked off a consultation on an EU-wide 2030 carbon
cap in March, "A 2030 framework for climate and energy
policies", with no link to reform of emissions trading.
The two make a good fit.
An informal Commission proposal for a 40 percent EU-wide cut
in greenhouse gas emissions by 2030 - compared with 1990 levels
- is a good place to start in longer term emissions trading
If the cut were applied entirely to the ETS - leaving the
non-ETS sector including transport, small businesses and
households unscathed - then the cumulative EUA surplus would be
wiped out by 2026 and price tension restored long before then.
That would be a similar impact to cancelling 1.5 billion
EUAs today, a far more ambitious move than that rejected by
Parliament. (Chart 2)
(Reporting by Gerard Wynn)