UPDATE 2-EU Commission seeks March start for CO2 permit withdrawal

Wed Jan 8, 2014 12:56pm EST

* Member state officials agree on scope of supply cut plan

* Uncertainty remains over market intervention start date

* Carbon prices end 2.3 percent lower on the news (Updates with analyst comments, background)

By Ben Garside and Michael Szabo

LONDON, Jan 8 (Reuters) - The European Commission has proposed fast-tracking a plan to prop up carbon prices in the EU's Emissions Trading Scheme after member states on Wednesday agreed to a withdrawal of as many as 400 million permits this year.

Member state officials approved rules governing how and when 900 million carbon permits can be withdrawn over the next three years under the Commission's so-called backloading plan, the 28-nation bloc's executive said on its website.

Traders are closely monitoring when the supply cut will begin, as analysts predict backloading will double carbon prices currently languishing near record lows below 5 euros.

The rules agreed on Wednesday had been widely anticipated, but the decision leaves uncertainty over how many permits can be withdrawn from government auctions this year, because that figure depends on when the law is formally adopted.

This uncertainty meant the market was underwhelmed by the news, leading the benchmark EU carbon contract to close down 11 cents at 4.65 euros.

"If the auction calendars can still be adapted by end-March, a total of 400 million allowances will be backloaded for 2014. This amount will be reduced to 300 million if backloading is initiated in April, May or June," the Commission said.

The Commission proposed backloading in 2011 to lift carbon prices to levels that would prompt companies to cut their greenhouse gas emissions, but the measure took over two years to be agreed amid worries it could slow the EU's economic recovery.

SCRUTINY PERIOD

The backloading law must now complete a three-month scrutiny period before it can advance towards entering into force.

But the Commission said Europe's climate chief Connie Hedegaard has written to EU member states and the bloc's parliament seeking to shorten that period.

"How much shorter the period will be lies in the hands of the Council and Parliament," it added.

Analysts at Thomson Reuters Point Carbon said that in a best case scenario, a one-month scrutiny period would be proposed by the parliament's environment committee later this month, and agreed by the full plenary in early February.

Backloading would then need approximately two weeks to become law, after which the Commission would require a further two weeks to alter the schedule of permit auctions.

"If the scrutiny period is anything over a month, it'll be close. They have a maximum of around 45 days," said Point Carbon's Marcus Ferdinand.

If no units are withdrawn from sales before March 31, it will mean just 300 million permits can be withheld this year, which Ferdinand said would be slightly bearish for the market.

"There would be a small price difference between the 300 million and 400 million options," he added.

Under the proposal, the 900 million permits are due be removed from the market by the end of 2016, and reintroduced in 2019 and 2020 unless further reforms are agreed. (Editing by Tom Heneghan and Anthony Barker)

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