* Withdrawal of 900 mln permits should limit volatility
* Commission outlines six plans for deeper reform
* Long-term fix could take years, backloading can be quick
By Barbara Lewis
BRUSSELS, Nov 14 The European Union must agree
by the end of this year on a stop-gap measure to tackle the
virtual collapse of its main instrument for cutting carbon
emissions, the bloc's climate boss said on Wednesday.
Allowances on the EU Emissions Trading Scheme (ETS) sank
below 8 euros a tonne, down more than 6 percent on the day,
reflecting trader disappointment Climate Commissioner Connie
Hedegaard's statement on Wednesday did not go further.
Anticipation of EU action to support the market has been
behind a slight recovery for the price of an emissions permit
from a record low of 5.99 euros hit in April.
At the start of this week, the Commission, the EU executive,
delivered its formal proposal for a temporary withdrawal - or
backloading - of some of the huge surplus of allowances
generated by economic slowdown that crushed demand.
But while EU officials have always said that far-reaching
reforms would require time, the market has been disappointed by
their inability to take stronger action quickly. Even the
temporary backloading needs to secure approval of member states,
which are expected to vote on it next month.
"Market operators must have clarity before year-end on this
(backload)," Hedegaard said in the statement.
"Our carbon market is delivering emissions reductions. But
because of the oversupply in the market, the ETS is not driving
energy efficiency and green technologies strongly enough," she
said. "This is bad for Europe's innovation and competitiveness."
FLAWED FROM THE START
At the root of the problems for a market mechanism that
aimed to push the power industry towards cleaner energy by
making it more expensive to burn coal, is the original
parcelling out of permits several years ago.
Heavy industry and developing markets like Poland demanded
higher volumes of permits to allow them to grow and compete.
Exacerbated by a weak economy that has reduced demand for
electricity, the result is a flood on the market.
The Commission on Monday proposed deferring the auction of
900 million allowances that would have been sold between 2013
and 2015, the first three years of the next phase of the EU
Emissions Trading Scheme (ETS), until 2019-20. But it is not yet
clear how much support there will be for the plan.
The EU's biggest economy Germany has not taken a formal
position and coal-dependent Poland and heavy industry have led
opposition to anything that would drive up the price of carbon
"Poland maintains its negative stance towards any
interference with the CO2 permits market that would lead to an
artificial rise in their prices," the Polish economy ministry
said in a statement.
Energy companies ranging from oil major Royal Dutch Shell
to First Solar are among those clamouring for
a stronger carbon price to drive innovation and a move away from
In an open letter, they echoed Hedegaard's call for swift
action, as well as deeper reform, "so that the EU ETS as a whole
remains the cornerstone of EU climate and energy policy".
Other signatories included Alstom, Dong Energy
, EDF, E.ON and Statoil.
Although some market participants had called for deeper cuts
to address the allowance glut, the Commission decided on the
figure of 900 million allowances because it said this would have
a "proportional impact".
It should result in "a more gradual build-up of the
structural surplus, thereby reducing the risk of market price
volatility in the transition to phase 3," it said. Phase 3
covers the period 2013-2020 for the ETS.
The Commission's views on long-term change for the scheme
emerged last month in a draft seen by Reuters.
The difficulty of deeper reforms is that they would take
years under EU processes, making it unlikely they could be
achieved before the current European commissioners end their
term in 2014.
The structural measures include raising an EU target to cut
emissions to 30 percent by 2020, from a current goal of 20
percent. Debate on increasing ambition beyond existing 2020
green policy goals has stalled so far, with Poland again leading
Other options include permanently cancelling allowances,
rather than just deferring them, and bringing other sectors into
the ETS in addition to those, such as industry and utilities,
already in the plan.
Adding aviation has met with international fury and the
Commission this week announced a plan to freeze for a year the
requirement for all flights to and from EU airports to pay for
emissions through the ETS. The exemption does not apply to
internal EU flights.