UPDATE 3-Carbon wins lifeline after tight EU parliament vote

Wed Jul 3, 2013 10:58am EDT

Related Topics

* Carbon price jumps as much as 13 percent

* Close 344-311 vote follows months of wrangling

* Will need member state backing to become law

* German economy ministry says still against the plan (Adds comment, updates prices)

By Michael Szabo, Nina Chestney and Andrew Allan

STRASBOURG/LONDON, July 3 (Reuters) - The European Parliament after months of bitter debate backed a plan on Wednesday to boost carbon prices, throwing a lifeline to the EU Emissions Trading System (ETS) and the bloc's push for greener energy.

EU politicians in Strasbourg voted 344-311 in favour of temporarily removing up to 900 million permits from trade, tackling oversupply that has sent carbon prices to record lows.

The plan will now require backing from a majority of EU countries to become law.

"A lot of member states are coming out in favour ...We need to see what the formal vote is. Realistically, it will not be until after the German elections (in September)," EU climate chief Connie Hedegaard told Reuters.

The ETS is a cornerstone of European Union climate policy, but a much higher carbon price is needed to achieve its goal of spurring industry to invest in low-carbon energy.

EU politicians voted against a plan put forward last month but agreed to allow a one-off intervention in the market to temporarily withdraw up to 900 million permits.

Companies and utilities buy these to cover their excessive carbon emissions output.

"The 'yes' vote should provide a short-term boost to carbon prices and confirms the EU's commitment to the success of the ETS and to implementing the long-term improvements that are still needed," said Thomas Rassmuson, founding partner at CF Partners, an investment firm specialising in renewable energy.

TEMPORARY BOOST?

EU carbon prices were down ahead of the vote but traders took the outcome as a signal to buy, with prices jumping as much as 13 percent to 4.86 euros a tonne in afternoon trade.

Shares in Germany utility E.ON briefly turned positive after the vote before falling back on a lower benchmark DAX index. RWE shares were down 0.9 percent.

Analysts have estimated that EU carbon prices could average 8 to 9 euros over the next eight years, almost double current levels, if the plan to temporarily remove permits is implemented.

Ultimately, they say carbon prices must reach levels of 40 to 50 euros to drive investment in lower carbon energy, something governments are keen to see happen to help them reach environmental targets.

Poland opposes efforts to bolster carbon prices, however, as its economy still relies heavily on carbon-intensive coal.

Germany has failed to take a formal position as the economy ministry opposes it on concerns it will hurt competitiveness, while the environment ministry supports the plan.

"Today's decision is regrettable. The economy ministry's criticism remains unchanged," a ministry spokesman said.

Other opponents include energy-intensive industries loath to pay higher energy costs, free trade advocates against intervening in markets, and some who argue temporary removal of permits will not raise carbon prices to meaningful levels.

Some energy companies have strongly supported the permit removal plan. Finnish utility Fortum said it marked a step toward needed, deeper reform.

"A more profound renovation of emissions trading is necessary," Fortum Chief Financial Officer Markus Rauramo said, noting the market would benefit from the setting of 2030 EU emissions reduction targets. (Additional reporting by Christoph Steitz, Barbara Lewis, Nerijus Adomaitis, Michel Rose, and Sarah Marsh; editing by Jason Neely)

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