UPDATE 3-EU politicians back plan to withhold EU CO2 permits

Tue Feb 28, 2012 9:25am EST

* EU industry committee vote paves way for intervention

* EU carbon prices fall over 5 percent by early afternoon

* Polish opposition threatens to scupper set-aside survival

By Ben Garside and Nina Chestney

BRUSSELS/LONDON, Feb 28 (Reuters) - European Union politicians backed a proposal on Tuesday to withhold carbon permits from the bloc's emissions trading scheme (ETS) from 2013, paving the way for the EU Commission to intervene in the market to prop up low prices.

EU Parliament's industry committee passed a proposal which would let the EU Commission take measures that "may include withholding of the necessary amount of allowances" from the 2013-2020 phase of the EU market as part of a wider debate on energy efficiency.

The EU ETS caps the emissions of some 11,000 factories and power plants in the bloc, forcing them to buy carbon permits to cover their emissions output.

Analysts say the Commission, which oversees the scheme, over-estimated the number of permits that heavy emitters would need to cover their emissions in the 2008-2012 period, resulting in over-supply, which has driven prices far below the level needed to encourage a shift towards a low carbon economy.

They estimate there is a surplus of carbon permits called EU Allowances (EUAs) to 2020 ranging from 500 million to 1.4 billion.

Before the intervention becomes law, the Commission has to make a proposal to withhold permits, which could go to a technical committee and would then require approval by governments and parliament.

Denmark, a proponent of strong efficiency measures and chair of discussions between member states, has pledged to complete the wider energy efficiency bill before its term as holder of the rotating EU presidency expires in July.

But while the bill is slated to be passed before July, it is unclear whether the so-called set-aside provision will survive.

DIVIDE

Member states are divided on whether to impose extra carbon costs on their industries amid tepid economic growth. Polish members of the European Parliament's main centre-right grouping have opposed any form of set-aside.

Heavily reliant on coal, Poland is concerned about the impact of stronger carbon prices on its economy.

The European Commission itself is also split on whether to impose a set-aside, despite Climate Commissioner Connie Hedegaard being in favour.

Antonio Tajani, who heads the Commission's industry department, on Tuesday cautioned against intervening in the cap-and-trade scheme.

"The pricing of allowances should be left to the market. Prices would recover by themselves as soon as the economy were to pick up," he told journalists before the vote.

Supporters of market intervention span the political divide and include industry as well as the environmental lobby. They argue decisive parliamentary backing would make it hard for the EU Commission, the 27-member bloc's executive, not to act.

In a letter ahead of the vote, companies such as Vestas , Dong Energy, Alstom, Eneco and SSE, urged politicians to back the proposal to incentivise investment in low carbon technology development and energy efficiency.

Benchmark EUAs rose over 1 percent immediately after Tuesday's vote announcement to as high as 9.63 euros a tonne, before falling to 9 euros a tonne by 1416 GMT.

"There is still a lot of uncertainty. We don't have a number and we don't know how they are going to do it," said a carbon trader at a large European utility.

In December an environment committee vote called for the withdrawal of 1.4 billion carbon permits from the market beginning in 2013.

Tuesday's industry committee instead voted on a compromise amendment that could include withholding the "necessary" number of allowances.

By leaving out a specific number, the committee vote has left open the possibility of a set-aside at some point, subject to a Commission assessment, said Deutsche Bank carbon analyst Mark Lewis.

"(It) also left open the question concerning whether or not any future set-aside would constitute a permanent or only a temporary withdrawal of allowances," he added.

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