London, 20 December 2011

The EU ETS finally received some good news in response to the vote by the European Parliament's environmental committee to approve a draft of the new energy efficiency directive, according to Trevor Sikorski of Barclays Capital. While addressing energy efficiency is a right in its own, it is expected to reduce emissions in both the traded and non-trade sectors.

The good news according to Sikorski is that in response to these measures, the draft directive now contains provisions that would:

• Call on the EC to amend the auction regulation to withhold a "significant" volume of EUAs from the EU ETS before the start of phase 3;

• Require the EC to adopt a decision to reduce the number of EUAs by 1.4 Gt; and

• increase the reduction factor of the EU ETS cap from a 1.74% reduction per year between 2013 and 2020 to a 2.25% cut per year, a move that would initially reduce the EU ETS cap by some 480 Mt.

"While there are some ambiguities around the exact consistency between the set-aside amendments and the cap amendment, this reflects the likely opposition to the change to the cap that is less strident in terms of the set-aside. We note that the first amendment received widespread support whereas the other two amendments passed on very close votes. The draft directive does have a long, arduous road in front of it, having first to come out of the industry committee (a vote at the end of January) before heading into a full co-decision requiring a full parliament vote (maybe by April) and approval from the council of ministers (after that). Given the closeness of the vote in the environmental committee on the later two amendments, a likely outcome would be that only the first makes it through to the final bill stage.

"While today is good news, there are still some very serious obstacles to be crossed and the exact level of the set-aside and any change to the cap still needs to be clarified. We would caution against over optimism, but this does feel like a seasonal treat from the EU to those in the carbon market.

"While EUA prices started rising today, with EUA prices up more than 1.5 EUR/t to over 9.0 EUR/t on yesterday's close and CERs up some 1.0 EUR/t at 5.6 EUR/t, the market has run with the news. The reality, though, is that there is still a long way to go before we see exactly what emerges. What is clear however is that there is some willingness to tighten up the market, and we believe the Danish presidency of the EU starting in January may just look at this as something achievable during its time at the helm. Finally, a reason not just to be short."

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