UPDATE 1-EU Commission to publish ETS rescue plan next week

Fri Jul 20, 2012 12:15pm EDT

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By Barbara Lewis

BRUSSELS, July 20 (Reuters) - The European Commission confirmed on Friday that it will announce plans next week to withhold carbon allowances to support the struggling Emissions Trading Scheme (ETS), which has suffered a collapse in prices under the burden of oversupply.

It has decided on a two-step process to reinforce the legality of what is meant to be a relatively quick fix to the market's weakness. Concerns about possible delays and lack of detail about next week's announcement drove ETS prices sharply lower earlier in the week.

At a meeting on July 25, the EU's executive will adopt a proposal clarifying an article of the ETS law on the timing of auctions of permits.

Commission spokeswoman Pia Ahrenkilde Hansen said the Commission would also "transmit to member states a draft for a future adaptation of the timing when emissions allowances would be auctioned".

She added that all interested parties would be able to express their views on the proposal for the delaying of carbon allowance auctions, referred to as backloading.

The Commission would not say how long the process will take, but EU sources said that it hopes the use of a streamlined EU procedure -- known as comitology -- for the backloading proposal will allow it to be completed within months. Other methods of passing EU legislation can take substantially longer.

The legal amendment could also be agreed through an accelerated procedure, lasting months rather than years, provided that there was political will, the sources said.

Next week's announcement follows a pledge from Climate Commissioner Connie Hedegaard that she would come up with a plan before the August recess in Brussels, when the European Parliament and the Commission suspend work for up to a month.

PRESSURE

She is under pressure to deliver a solution in time for the next phase of the ETS, which begins in 2013, when more industries will become part of the scheme and fewer free allowances will be handed out.

Fears about a delay to the Commission's effort to support the carbon market pushed it down to a low of 6.67 euros per tonne on Thursday. On Friday it rose by about 4 percent to more than 7 euros, but this is still far below the level of 20 to 50 euros that analysts say is necessary to support low-carbon investment.

Traders said that the market was also eager for firm numbers on how many permits should be withheld, which EU sources said they did not expect to emerge on Wednesday. More detail could be released after the August recess, when the Commission is expected to publish a review of the carbon market.

European Parliament committees threw their weight behind the idea of market intervention in a series of votes last year, but these were a signal of the desire for action rather than a guarantee it would happen.

Most member states are also said to back the idea of a fix, and an Energy Efficiency Directive agreed in June was accompanied by a declaration of intent that there was a need to support the carbon market.

Poland, however, which is heavily dependent on carbon-intensive coal, has said there is no justification for meddling. It says that the ETS was set up to cut emissions, rather than establish a carbon price, and that a weak market is helpful in difficult economic times.

From the business sector, oil and gas companies including Royal Dutch Shell have called for intervention because carbon prices are too low to drive technologies, such as carbon capture and storage.

Heavy industry is resistant to intervention and some have questioned the legality of the Commission's proposal; doubts that the legal clarification is designed to quash.

Even if the Commission succeeds with its proposal to delay the auction of some permits, many analysts say that the real need is to remove allowances permanently, which would require a much more detailed EU process. (Additional reporting by Jeffrey Coelho in London and Francesco Guarascio in Brussels; Editing by Luke Baker and David Goodman)

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