December 11, 2014 / 11:07 AM / 4 years ago

Analysis: EU carbon market reforms heading for an early start

LONDON (Reuters) - Reforms to reduce a glut of emissions in Europe’s carbon market look increasingly likely to kick off in 2017, four years earlier than initially proposed, as support grows among lawmakers for an early start.

A draft proposal on the reforms published in November has attracted 115 amendments from European lawmakers seen by Reuters in a leaked document late last month. Several of the amendments call for an earlier start to the MSR.

Bringing forward the plan to take hundreds of millions of surplus permits out of circulation has the backing of Germany and Britain, as well as major energy companies such as Britain’s SSE and Drax and Sweden’s Vattenfall [VATN.UL].

These firms fear that in the absence of a strong EU-wide carbon price, countries will start introducing domestic legislation to curb emissions, creating uncertainty about future carbon costs.

“These would not be a harmonized approach and some national policies could even work against each other, the overall cost would be significantly higher,” Stefan Dohler, a member of Vattenfall’s executive group management, told Reuters in an interview in September.

The EU’s Emissions Trading System (ETS) is the bloc’s flagship policy to cut greenhouse gas emissions by charging for the right to emit carbon dioxide, but weak economic growth across Europe has cut industrial production and energy demand, creating a glut of more than 2 billion permits.

Prices for EU allowances (EUAs) have plummeted to less than 7 euros ($9) a tonne from almost 30 euros six years ago, leaving the market too weak to spur a switch to low-carbon technology.

To boost prices, the EU plans to take hundreds of millions of surplus EUAs out of the market from 2021 and place them in a Market Stability Reserve (MSR). It would put them back into circulation if demand rises.

“With the support that the German amendments are getting from other member states, I would still expect the MSR to have an accelerated start date of 2017,” said Mark Lewis, analyst at Paris-based financial services group Kepler Cheuvreux.

Amendments to be discussed show the European People’s Party - the largest political group in the European Parliament - is split between weakening the proposal, by slowing down the rate at which permits would be withdrawn from the market, and favoring the 2017 start date.

“It will be a tough fight - but 2017 is definitely a possibility. I would say 65 percent,” said a source at the EU Parliament who did not want to be named.

PRICE IMPACT

Another issue to be agreed is whether 900 million EUAs, being gradually withheld from the market from this year to 2016 in a process called backloading, should be put in the MSR rather than being returned to the market from 2019.

EUA prices could treble from current levels to 21 euros a tonne by 2020 if the MSR starts in 2017 and backloaded permits are placed into the reserve, Trevor Sikorski, an analyst at London-based consultancy Energy Aspects said.

If the MSR starts in 2021 and backloaded permits are placed in the reserve, prices are likely to only reach 10 euros by 2020, he added.

Analysts do not expect the MSR to become law until the third quarter of next year at the earliest.

Poland, reliant on emissions-heavy coal for electricity generation, is leading the fight against higher carbon costs. BusinessEurope, representing 39 business groups across Europe, is also against adopting the MSR before 2020.

On top of that, some European Members of Parliament are against any intervention in the carbon market at all.

“We were sold the ETS on the basis of a market mechanism but if you require constant regulatory interference...that is not a market mechanism, it is a dog’s breakfast,” Roger Helmer, a British MEP and member of the UK Independence Party, said during a European Parliament debate last month.

Additional reporting by Barbara Lewis in Brussels, Vera Eckert in Frankfurt and Anna Koper in Warsaw; Editing by Nina Chestney and Michael Urquhart

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