Crunch vote nears that could kill EU carbon fix

Tue Apr 9, 2013 9:27am EDT

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* Vote hangs in the balance

* Industry opinion divided, Poland opposes, Germany undecided

* Longer term structural reform would take time

By Barbara Lewis and Nina Chestney

BRUSSELS/LONDON, April 9 (Reuters) - Months of bitter argument culminate next Tuesday in a make-or-break vote on an attempt to prop up the European Union carbon prices, which plunged to record lows earlier this year.

A proposal put forward by the European Commission last year to remove temporarily some of the glut of carbon allowances that has depressed the Emissions Trading Scheme (ETS) was meant to be a quick and easy fix.

But opinion is deeply divided and EU sources say a defeat in a plenary session of the Strasbourg parliament expected on April 16 would almost certainly kill the short-term plan.

In theory, the vote is on a highly technical amendment to shore up the legality of removing permits from the scheme, which is being debated in parallel by member states.

"It's a tiny little proposal, but it's become an enormous debate because it's seen as the opening skirmish," one EU source said on condition of anonymity.

The short-term plan would be a prelude to longer-term structural reforms, such as the permanent removal of allowances.

"It is being watched internationally in terms of a test of the European Union's will to save its carbon market," Bryony Worthington, founder of non-governmental organisation Sandbag, said.

Within the European Parliament, the single biggest political group, the European People's Party, has mostly opposed the intervention.

In contrast, more than half of the EU member states has backed it, but a few, including coal-reliant Poland, have not.

Dominant member state Germany, facing an election year, has refused to take a position as industry complains a higher ETS would drive up energy costs, reducing its competitiveness.

INDUSTRY DIVIDED

Chemical giant BASF has argued for longer term reform, while opposing short-term intervention.

"Shale gas has made energy prices drop dramatically in the United States, while that is not so in Europe. We need to take that into account," Wolfgang Weber, a vice president at BASF, said.

The Commission has sought to address warnings from some in industry that they are in danger of being driven out of Europe with a "carbon leakage" list of industrial sectors entitled to free carbon allowances to prevent them leaving the continent and just adding to pollution elsewhere.

A study on Tuesday from Dutch consultancy CE Delft, which has given advice to the Commission on policy issues, noted the existing list, to be revised next year, was drawn up on the assumption of a 30 euro ($39) carbon price, 10 times higher than the historic low of less than 3 euros touched in January.

Of the biggest industrial sectors, it found only crude oil and natural gas extraction should still be entitled to free allowances, whereas other leading energy users, such as oil refining, cement and iron and steel should have to pay for permits to pollute through auctions of allowances.

Others in industry back the stop-gap measure, referred to as backloading, of temporarily removing permits and returning them to the market later.

Royal Dutch Shell, for instance, which is keen to promote natural gas, rather than more carbon-intensive coal, has lent prominent support. So too have many in the power sector.

Oystein Loseth, president and CEO of Sweden's Vattenfall, said the European Union was "at a crossroads".

In one direction, it faces a fragmentation of EU energy and environment policy as some states would take their own measures to support the ETS. Britain already has a carbon price floor.

The alternative route would lead to a single, efficient market-place and ultimately reduced costs. "The ambition must be to re-establish the ETS as a strong driver," Loseth said.

Those who want backloading, also want deeper reform but say that will take too long under EU processes that require parliament and member states to endorse proposals from the EU executive.

Commission officials have admitted time is running out for agreement on far-reaching measures before the current team of commissioners steps down next year.

EU carbon prices have crept up since the January low to around 5 euros a tonne as traders have bet on a positive vote. Analysts predict a 'no' will drive the price towards zero.

"The plenary vote on 16 April will be close, and therefore represents another do or die moment for the troubled European ETS," said Matthew Gray, carbon analyst at Jefferies Bache.

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