UPDATE 1-EU carbon trading reform proposal this yr-Oettinger

Mon Apr 16, 2012 12:15pm EDT

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* EU ETS not sending out strong enough price signal

* ETS has to be flexible, withstand economic shocks (Adds quotes, background)

By Barbara Lewis

COPENHAGEN, April 16 (Reuters) - The European Commission is likely to prepare a legal proposal on reforming its emissions trading scheme (EU ETS) before the end of the year, EU Energy Commissioner Guenther Oettinger said on Monday.

Speaking at a European Wind Energy Association conference in Copenhagen, Oettinger said the 27-nation bloc's trading scheme was failing to set a strong enough price to encourage investment in low carbon energy.

"At the moment, there is no price signal. We have to prepare a proposal. There is an expectation from the European Parliament," Oettinger said. "We hope to come to a conclusion before the end of the year."

Prices for carbon permits under the EU ETS are trading at around 6.90 euros ($9.03) a tonne. They hit a new record low of 5.99 euros on April 4, well below the level needed to encourage green investment.

The trading scheme caps emissions from industrial plants and utilities, forcing them to buy carbon permits to cover their emissions output.

By investing in low-carbon technologies, such plants could reduce the number of permits they need to buy.

However, the financial crisis and recession have reduced industrial output and therefore demand for permits, with over-issuance of the permits exacerbating excess supply.

The European Parliament has called on the commission to draw up a plan to withdraw a certain number of permits from the scheme, but there is still division among member states.

INFORMAL DEBATE

An informal meeting of environment ministers hosted by the Danish EU presidency on Thursday is expected to hold a lunch-time debate on the issue.

Oettinger did not specify what the commission would propose but said the the trading scheme needed to be more immune to shocks, referring to the fact that caps on emissions were set too high and the system's design failed to properly account for the effects of recession.

"The question is, 'Can we develop our ETS so it will be flexible to react to economic developments?'," Oettinger said.

One way of introducing tighter caps would be for the EU to target a 30 percent cut in carbon dioxide emissions by 2020 instead of the current aim of 20 percent.

Poland, which as a heavy user of carbon-intensive coal fiercely opposes anything that could drive up the price of carbon permits, in March vetoed an attempt by the Danish presidency to get agreement on more ambitious milestones for carbon reduction.

Responsibility for reform of the ETS falls under the EU Commission's climate division, rather than energy, although it has ramifications for energy policy.

"The commission is looking at different options on the table," Isaac Valero-Ladron, EU spokesman for climate action, said.

($1 = 0.7644 euros) (Writing by Nina Chestney; editing by James Jukwey)

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