UPDATE 1-EU Commission wants 900 mln permits withheld to boost CO2 market

Mon Nov 12, 2012 3:21pm EST

* EU member states expected to vote on Dec. 13

* Commission to follow up with carbon market report

* Market rallied ahead of announcement

By Barbara Lewis

BRUSSELS, Nov 12 (Reuters) - The European Commission proposed postponing the auction of 900 million pollution allowances in the next phase of the EU Emissions Trading Scheme, to prop up the carbon market.

The plan would push back allowances from the first three years of the 2013-2020 phase of the ETS, a scheme meant to reduce the output of climate-changing gases.

The market has lost its effectiveness because of a glut of allowances unused in the regional economic slowdown.

"The figure of 900 million allowances has been put forward in the light of views expressed by member states and stakeholders," the Commission said in a statement on Monday.

Earlier this year, the Commission outlined its plan with options for withholding temporarily - known as backloading - 400 million, 900 million or 1.2 billion allowances.

Anticipation of Monday's announcement, which came after the market close, had driven allowances on the ETS to just above 9 euros, up nearly 9 percent from the previous close.

That is substantially up from a record low of 5.99 euros per tonne of carbon reached in April.

The Commission's plan will now be debated further by EU member states, which are expected to take a vote on Dec. 13.

So far Poland, which is heavily dependent on carbon-intensive coal, has stood out as the main opponent of intervention to raise the carbon price.

BUSINESS DIVIDED

Some representatives of heavy industry say intervening would impose an undue burden in difficult economic times and could drive plants out of Europe.

Others, including oil majors such as Royal Dutch Shell , keen to justify investment in technology such as carbon capture and storage, and Dong Energy, have spoken in favour of action.

Apart from the short-term solution of a temporary withdrawal of permits, the European Commission is also expected to put forward proposals for more lasting solutions to the carbon market's weakness, such as permanent removal of allowances.

Details are expected in a carbon market report scheduled for publication on Wednesday.

Campaign groups said Monday's proposal marked some progress.

"It's an important first step," Sanjeev Kumar, senior associate at non-governmental organisation E3G, said. "It's crucial to move now on to the debate about cancelling allowances."

An impact assessment published together with Monday's proposal estimated the surplus of allowances on the ETS at the end of last year stood at almost 1 billion.

It said that surplus was likely to keep growing, because of economic weakness that has sapped demand from industry and utilities, as well as improved energy efficiency measures.

"Overall a surplus is expected by 2020 in the order of magnitude of 2 billion," it said.

The change to the auction timetable as proposed by the Commission does not change the overall quantity of allowances.

"Back-loading is expected to increase the carbon price, compared to the current timetable, in the short-term, but this expected to be balanced with a decrease in the price later on," the assessment of the draft law's impact said.

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