BRUSSELS/LONDON European lawmakers backed an emergency plan to save the world's biggest market for carbon allowances from collapse on Tuesday, but put off drafting the necessary legislation, sending prices down by as much as 20 percent.
The carbon market, a pillar of the European Union's climate policy to cut greenhouse gas emissions, has hit a series of record low prices because of a huge surplus of allowances, mostly caused by economic recession in the euro zone.
The Commission's proposed plan, referred to as backloading, entails temporarily removing some of the surplus that has pushed prices far below the levels needed to make low carbon investment profitable as part of efforts to curb planet-warming emissions.
On Tuesday, members of the environment committee of the European Parliament gave their support to the plan by 38 votes in favor, 25 against and two abstentions. But they said they needed time to decide on a possible mandate for negotiations on wording of legislation.
They are now expected to decide next week whether to take the discussion straight to a plenary session of the European Parliament, expected in April, or whether to speed up the process by kicking off legal haggling between the parliament, Commission and member states before then.
The European Commission had hoped backloading would be a quick fix pending deeper reform, but it has run into opposition from member state Poland, which relies on carbon-intensive coal for most of its energy, as well as some in industry and business.
The views of member states will be sought at a committee meeting on February 27. Dominant EU member Germany has yet to take a stance.
Carbon prices plunged to a 12-day low of 4.09 euros a tonne, which compares with an all-time low of less than 3 euros per tonne in January.
The market later recovered slightly to end the day down 8.6 percent at 4.68 euros.
Traders said that carbon prices had rallied strongly in anticipation of a positive vote, reaching 5.52 euros on Monday, the highest in almost a month.
"The fast-track mandate is an option and not a requirement. The fact Parliament did not decide today will likely prove inconsequential," said Matthew Gray, analyst at Jefferies Bache.
"Beyond the 'buy the rumor, sell the fact' element, the price decline likely came from disappointed traders who were expecting an intraday rally to maximize profit-taking potential."
At every stage, the debate has been intense.
Climate Commissioner Connie Hedegaard in a tweet welcomed a "clear, positive vote", while Polish Environment Minister Marcin Korolec said, also by Twitter: "Common position still far away".
Those supporting the Commission emergency plan to remove some of the surplus of carbon allowances say the action is essential as a first step to deeper reform.
Otherwise, the energy industry could face a decade without any kind of investment signal, and carbon emissions would almost certainly rise as there would be no deterrent to burning carbon-intensive coal.
"This outcome signals the intention of the European Parliament to begin the process of restoring the most cost-effective approach to meeting Europe's energy needs and reducing emissions over time," said David Hone, chief climate change adviser at Royal Dutch Shell.
Those against the plan say the carbon market's weakness is just a reflection of low demand in difficult economic times and that action to boost the carbon price would increase energy prices, reducing EU competitiveness on world markets.
Even those who support it are very clear more is needed.
"The Parliament's support today can only be a first step towards reinforcing the ETS in the longer term," said Hans ten Berge, secretary general of Eurelectric, which represents the electricity industry in Europe.
"Policymakers must now turn their attention to addressing structural measures that can provide a clear pathway for carbon emissions reduction beyond the third trading period and up to 2050."
(Additional reporting by Ben Garside, Claire Davenport; Editing by Will Waterman)