The European Union's executive body presented first ever plans to boost
EU carbon prices, a controversial effort to fix the problem of low prices that
has been crippling the EU market for years, raising questions about its own
existence.
Wednesday, the European Commission released a proposal to slow down the pace at
which permits to emit greenhouse gases--which are called allowances and give
the owner the right to emit one metric ton of CO2-- are sold on the Emissions
Trading System. Less allowances on the market should create a shortage that
would in turn boost prices.
"The EU ETS has a growing surplus of allowances built up over the last few
years," Connie Hedegaard, EU commissioner for Climate Action, said in a
statement. "It is not wise to deliberately continue to flood a market that
is already oversupplied," she added.
Low prices have been the main, underlying problem of the ETS and has been
calling into question the effectiveness of what the EU considers its flagship
program to cut greenhouse gas emissions. At the same time, any effort to boost
prices is controversial because some industries only see higher CO2 prices as a
cost increase and oppose any action.
On the ETS, companies exchange emissions permits, whose number is capped. The
system aims to encourage companies to invest in clean technologies to reduce
their emissions in the long term, rather than buying more permits to emit more
CO2.
In theory, the higher the price, the higher the incentive to invest. Critics,
however, have highlighted that the mechanism hasn't yet been able to push the
carbon price high enough to be a trigger for large green investment.
Prices have hit record lows this year on a growing oversupply of allowances in
the market and expectations that the situation will not change even after an
overhaul of the ETS next year. Companies have in recent years needed less
permits because the economic downturn has reduced industrial activity and
therefore CO2 emissions, adding to a historical oversupply of emissions
permits.
Starting next year, the allowances will be auctioned to companies according to
a plan running to 2020. The commission proposed Wednesday to auction less
permits in the first three years --an operation called backloading-- but hasn't
put forward a precise number, leaving it to the European Parliament and the EU
member countries to discuss how many allowances should be sold later.
A commission analysis however, also released Wednesday, presents three
scenarios picturing a rejig of the auctioning timetable for 400 million, 900
million or 1.2 billion allowances.
The number is one of the most controversial issues, with environmentalists calling
for a backloading of as many as 2 billion permits.
The commission also presented a proposal to legally clarify its powers in
altering the auctioning timetable, which will have to get a green light from
Parliament and EU governments.
CO2 emissions futures for Dec. 12 were trading slightly over EUR7 on Wednesday
after the announcement, according to ICE data. They have touched lows around EUR6 in the past.