* Real risk of "undermining orderly functioning"
* EU must explore longer-term plans "without delay"
* Potential for structural surplus of about 2 bln allowances
* International credits have added to EU ETS surplus
By Barbara Lewis
BRUSSELS, Oct 23 A rapid rise in surplus EU
carbon credits is expected to slow from 2014 onwards, but to
tackle a short-term glut member states need to decide before the
end of the year on a temporary fix, a European Commission draft
The draft report on the carbon market also called on the
member states to discuss and explore options for more lasting
changes to the Emissions Trading Scheme (ETS) after allowance
prices hit a record low in April.
It urged the Climate Change Committee "to decide on the
proposed amendment to the auctioning regulation before the end
of the year in order to provide certainty for market
The committee brings together representatives of member
states as part of a fast-track process for lawmaking.
The Commission document seen by Reuters also urged the
European Parliament and the European Council of member states to
adopt a "mini-amendment" of the relevant law on the ETS, which
could ward off any legal challenge, for instance from industry.
Climate Commissioner Connie Hedegaard announced early this
year she would bring forward the market review, originally
planned for next year, and open the debate on changing the
auctioning timetable to govern when new permits are available.
The Commission is expected to publish its report officially
in November, as well as a legislative proposal to withhold
temporarily - or backload - some of the surplus of carbon
permits from the first part of the third phase of the market
The Commission routinely declines to comment on unpublished
drafts, although it gave an outline of its plan in July, when it
mapped out options for withholding either 400 million, 900
million or 1.2 billion allowances over the first three years of
the market's next phase.
RISK OF DISORDERLY MARKET
The draft seen by Reuters said the carbon market, meant to
be the central pillar of EU climate policy, was still "widely
recognised as a liquid and functioning market".
However, the surplus generated by economic recession was a
serious risk to its effectiveness.
"While from 2014 onwards the rapid build-up of the surplus
is expected to come to an end, the overall surplus is not
expected to decline significantly during phase 3, resulting
potentially in a structural surplus in most of phase 3 of around
2 billion allowances," it said.
"There is a real risk of seriously undermining the orderly
functioning of the carbon market by causing excessive price
fluctuation due to the additional short-term oversupply of
The expectation the EU will agree a course of action has
helped carbon allowances to recover from the low of 5.99 euros
hit in April, but they are still far too weak to encourage
investment in green energy. On Tuesday, the market was trading
just below 8 euros a tonne.
It is not yet clear how much member state support there is
for a temporary withdrawal of carbon permits, or how many
allowances EU nations might agree to withdraw.
So far Poland, which is heavily dependent on
carbon-intensive coal, has stood out as the main opponent.
In a statement on Tuesday, Polish Environment Minister
Marcin Korolec said the Commission's plans raised "the
possibility of arbitrary interventions and damage a sense of
stability of the market and undermine its very nature as a
From the business community, some representatives of heavy
industry say intervening would impose an undue burden in
difficult times and could drive plants out of Europe.
Others, including oil majors, such as Royal Dutch Shell
, keen to justify investment in carbon capture and
storage, for instance, and Dong Energy, have spoken
in favour of action.
Eurelectric, which represents the European electricity
industry, has said it supports backloading, but wants that to be
a step on the way to permanent change.
Beyond the short-term fix, the draft carbon market report
lists options for lasting reform, which would require a much
more extensive EU process.
They include raising the carbon reduction target to 30
percent in 2020 compared with an existing 20 percent goal,
permanently retiring allowances and revising the ceiling on the
number of permits to pollute that are made available.
The Commission also raises the prospect of bringing new
sectors into the ETS and limiting access for international
equivalents of the EU's credits.
"Without international credits, the surplus in the EU ETS by
2020 would potentially be only around a quarter of the presently
expected surplus," the draft said.
The last option listed is "discretionary price management"
measures, such as setting a carbon price floor.