UPDATE 1-EU Commission debates size of carbon auction delay
* Commission declines to comment
* Structural changes would take longer
* Could include tighter cap, permanent set-aside
* Business, market say permanent set-aside needed (Adds detail, comment)
By Barbara Lewis
BRUSSELS, June 14 (Reuters) - European Commission draft proposals to try to prop up the EU's Emissions Trading Scheme (ETS) could delay the sale of 400 million to 1.2 billion carbon allowances for years, EU sources said on Thursday.
The delay would cover the first three years of the next phase of the carbon market, 2013-2015, and then the allowances would be released over the following three years, 2016-2018, the sources said, speaking on condition of anonymity.
"The total amount of the backload would be either 1.2 billion, 900 million or 400 million allowances," one source said.
The Commission declined to comment, citing market sensitivity.
Carbon prices on the ETS have fallen to record lows below 7 euros ($8.80) per tonne, while analysts say prices of 20 to 50 euros are necessary to spur investment in low-carbon energy.
EU Climate Commissioner Connie Hedegaard announced in April the Commission would bring forward a review of the carbon market and as part of that process would look at modifying the auction rules.
The review should be published before the Commission's summer recess, which begins around August, and could serve as a quick fix to the ETS's problems.
Deeper structural changes would take much longer and would have to be decided through the full EU legislative process.
One of the sources said the proposals being discussed in the Commission also outline ideas for later changes, such as tightening the cap, which establishes how many emissions a member state and its industries can emit before having to buy allowances.
The proposals also raise the possibility of increasing the target to cut carbon emissions by 30 percent by 2020, compared with the current 20 percent cut.
This too could have the effect of countering a surplus of allowances resulting from recession, but the idea of a more ambitious emissions goal has met with stiff opposition from Poland, which is heavily reliant on carbon-intensive coal.
Another possibility is to extend the scope of the ETS to cover other parts of the economy such as transport.
CALLS FOR ACTION
Business leaders and some EU politicians have called repeatedly for action to remove the huge surplus of carbon allowances generated by the economic slowdown.
Trade association Eurelectric said the executive should work towards permanently setting aside a significant number of allowances.
"We welcome the Commission's initiative and the substance of the proposals, by which we mean both the quick fix and the more ambitious plans for structural reform," Jesse Scott, head of Eurelectric's environment and sustainable development unit, said.
"Specifically, we want the level of the backload to be significant and for the backload to be permanent."
In December last year, the European Parliament voted in favour of withholding 1.4 billion permits from the next phase of the ETS, but that vote was a political signal, rather than a binding decision.
The vote was part of the parliamentary debate on an Energy Efficiency Directive. The two issues became entwined as some politicians have argued that an improved record on energy saving could add to the surplus of carbon allowances.
Negotiators agreed on a text on the Energy Efficiency Directive in the early hours of Thursday, which includes a draft Commission statement that it will soon present its report on the carbon market, accompanied by a review of the auction profile.
It also says the report will examine deeper changes, which could include permanently withholding allowances.
Market analysts said the auction rescheduling would need to be followed by a permanent set-aside to ensure a shift towards greener energy sources.
"If it's 1.2 billion and it is out of the first three years, that is a significant number. It will create meaningful scarcity for generators, at least in the early years, and it would push up prices, no doubt," Mark Lewis, head of energy research at Deutsche Bank, said.
"If the allowances were removed on a permanent basis, anything towards the upper end of that range gets priced back into the fuel-switching range, which is certainly above 20 euros."
($1 = 0.7953 euros) (Additional reporting by Andrew Allan in London; editing by Rex Merrifield and Jane Baird)
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