(The author is a Reuters market analyst. The views expressed
are his own.)
By Gerard Wynn
LONDON, April 20 The European Commission has
smartly dodged a Polish roadblock on carbon market reforms, but
only with a short-term proposal for boosting prices which could
still leave these languishing until 2015 or beyond.
The European commission is in favour of higher carbon
prices, to drive emissions cuts, but at least one EU member
state, Poland, disagrees, and from there stems a skirmish which
threatens the scheme.
EU allowances (EUAs) are trading at or near record lows,
after recession dented pollution and demand for permits.
On Thursday the commission's head of climate action Connie
Hedegaard proposed a short-term solution. The question is
whether this will work - in raising prices - and whether a
longer term back-up is ready.
At present, there is no obvious reason why the short-term
remedy of temporarily withholding permits should boost prices,
as it simply holds these in reserve to swamp the market later.
Almost all analysts agree that the present carbon credit
glut is sufficient to leave the market over-supplied throughout
its third trading phase from 2013-2020.
That throws the debate forward to what longer term, back-up
solution the European Commission has.
It turns out this is the same as before Thursday - to amend
the underlying law, the Emissions Trading Scheme (ETS)
Directive, and permanently cancel surplus EUAs.
Given that amending a directive takes more than a year, and
the commission hasn't kicked off that process yet, that leaves
carbon prices potentially in limbo through 2015.
REGULATION VS DIRECTIVE
On Thursday, the commission proposed from next year to limit
the supply of EUAs under an amendment to an existing Auctioning
Regulation, which is secondary legislation under the ETS
It drew a firm riposte from Poland's environment minister:
"We simply do not have a mandate for manipulation in the market
mechanisms," said Poland's Environment Minister Marcin Korolec.
The coal-dependent economy was playing its trump card: that
the proposal deliberately manipulates carbon prices and so
requires a re-opening of the founding ETS Directive.
In the EU, amending a directive and a regulation are quite
different: the first takes over a year and requires a decision
by members state ministers and parliament; the other is a
technical decision achievable in months, requiring majority
approval by experts plus parliamentary scrutiny.
The commission's interim proposal hinges on successfully
arguing that it is "non-essential" to the carbon market, and so
doesn't need a re-opening of the directive.
However, even if successful, the commission then has to make
the withholding of EUAs permanent.
That would certainly require a re-opening of the ETS
Directive: if Poland loses the first round, it gets a re-match.
As well as being time-consuming, such a re-opening of the
ETS Directive is fraught with danger.
Directives, and amendments, are often approved by a majority
vote. One major exception is where these apply to tax measures,
where unanimity is needed.
The original ETS Directive was agreed by majority vote.
Emissions trading could be put on ice, or killed off, if
east European objectors successfully argued that cancelling EUAs
manipulated the carbon price and so counted as a tax measure.
That threat is probably a major reason why the Commission is
reluctant to back a carbon price floor, which would turn the
scheme more into a tax.
A price floor would be the simplest solution to support
EUAs. Proposed cap and trade schemes in California and
Australia, expected in 2013 and 2015, both propose price floors.
But in Europe, that would have to be legislated
retrospectively: and could be argued to be a tax measure.
While the existing EU Auctioning Regulation allows member
states to hold a carbon reserve price, that's more intended as a
technical feature, rather than a floor price.
It is meant to ensure that EUAs fetch fair value, in
relation to the market price, allowing states to withhold EUAs
for example if there were suspected collusion among bidders.
Analysts favouring a floor price argue it could operate in
another way, by setting an absolute price level.
This argument has a long way to run: supporters argue a
floor price is the only way to give the market a transparent
future. Detractors point to its legal hurdles as well as the
problem deciding where the floor should be set, and the windfall
it would hand traders if set far above present levels.
Meanwhile, waiting in the wings is Poland.
(Editing by James Jukwey)