* Chance of German support for backloading seen at 50 pct
* German support crucial for backloading deal
* German Jan. 20 election could end indecision
By Nina Chestney and Barbara Lewis
LONDON/BRUSSELS, Jan 11 The future of the
European Union's emissions trading scheme, meant to be a
cornerstone of the bloc's climate policy, is in the balance this
year as traders look to Germany to back a plan to boost low
Launched in 2005, the EU Emissions Trading Scheme (ETS) has
been beset by problems ranging from overestimating the number of
permits required by Europe's industry, to fraud, to a glut of
permits generated by low demand during recession.
As a result, EU carbon prices have lost more than 60 percent
of their value since May 2011 and hit record lows below 6 euros
Traders have hoped a European Commission proposal to remove
temporarily some of the surplus would boost prices.
But agreement on the proposal, known as backloading, is
uncertain because of outright opposition from coal-intensive
Poland and indecision from dominant EU power Germany.
A disagreement between Germany's environment and economy
ministries on the plan means the nation has yet to take a formal
position on backloading and could abstain from a vote by member
states, expected to take place in February.
The economy ministry, concerned about anything that will
increase costs for industry is against the proposal, while the
environment ministry has voiced support for the carbon market.
An abstention could be disastrous for the carbon market as
the EU's majority voting system needs the bloc's biggest
country's say, especially given the hostility of Poland, which
also has a significant number of votes.
"If Germany, and of course the UK, give their green light,
it should not take long to have all adopted and in place at the
earliest this year. Both countries hold the key for the deal,"
said an EU official who did not want to be named.
Carbon traders will closely follow a German local election
on Jan. 20, which could lead to a change of economy minister and
unlock the indecision.
A more sympathetic successor could mean Germany votes in
favour of the plan, but this is not a given and carbon analysts
say the probability of German support would only be around 50
Germany may slide into an abstention as it focuses on
federal elections later in the year, at which Chancellor Angela
Merkel will seek another term of office.
"The Germans may simply decide to hold off until their
federal elections are complete at the end of October before
making a decision on backloading," said Matthew Gray, carbon
analyst at Jefferies Bache.
"Given backloading may not commence earlier than the fourth
quarter, 2013 could, at best, be a groundhog year (year of
stagnation) for EU allowances. At worst, the proposal will fail
and prices will collapse, potentially to 3 euros."
Others say Merkel could step in to break the deadlock.
"It might well come down to Merkel wading in. With the
carbon price where it is now, the German energy transition just
won't work. They need a higher carbon price," said Tom Brookes,
director at the European Climate Foundation, said.
"Germany will vote for backloading in the end because I
don't think there is anybody who doesn't think some structural
change to the ETS is required."
However, Merkel famously refrains from decisions on EU
policy until the very last minute - a tendency likely to be
exaggerated in an election year.
She is caught between the twin pressures of needing to
finance a green energy transition as Germany winds up its
nuclear industry and a powerful industry lobby resistant to
paying more for its fuel.
Countries such as Britain, France and Germany could expect a
59 percent increase in carbon revenue for the years 2013-2015,
according to an internal Commission paper seen by Reuters.
Germany in particular needs that income if it is to
accomplish a shift away from nuclear power by increasing its
share of renewables.
Poland is among the nations that would not get any revenue
increase because it has been given permission to allocate many
carbon allowances for free under EU state aid law.
Behind the scenes, efforts are being made to forge a
compromise. Without backloading in place, it could be extremely
difficult to muster political will to implement deeper and more
permanent structural reform of the market.
"I think there has to be a pragmatic way in which everybody
can agree an interest in putting a floor on the price of carbon,
so the ETS will be able to survive," Phil Hogan, Environment
Minister for Ireland which holds the EU Presidency, told
The Commission does not intend to modify its proposal, a
Commission spokesman said.
(Editing by Keiron Henderson)