EC’s proposals could push up carbon prices

Oslo, 25 July 2012

The European Commission’s proposal to change the supply side of the European Emission Trading Scheme (EU ETS), announced today at 12:00 CET, could increase the price of European Union Allowances (EUAs) according to analysis from Thomson Reuters Point Carbon.

“If there ends up being an agreement on back-loading and cancelling in the order of 800 million allowances, which we think is in the upper range of what is politically feasible, we assume that carbon prices could increase by as much as €6/t on average over the 2013-20 period compared to current price levels” said Marcus Ferdinand, senior market analyst at Thomson Reuters Point Carbon. In the event of insufficient political support for such an intervention, carbon prices would probably collapse from current price levels, the latest Thomson Reuters Point Carbon analysis shows.

“The actual price impact is difficult to predict as there are still several political options on the table on how to realise the proposed market intervention”, said Ferdinand. He added, “the crucial decision is not only on the number of allowances that will be temporarily removed from the market, but more importantly on the timing and the volume of the EUAs that will be permanently cancelled in order to reduce the current oversupply. “In order to permanently cancel the back-loaded volume, a separate political decision is needed that will take some time and is not expected to be concluded before the end of 2014”, Ferdinand said, referring to the stepwise process of tackling the huge oversupply in the European carbon market. According to Thomson Reuters Point Carbon, the current oversupply is in the order of 1.8 billion allowances for the 2008- 2020 period (phases 2 and 3 of the EU ETS).

Today, the Commission proposed to clarify the legal basis for an amendment to the auctioning regulation as well as to reduce the amount of allowances that will be auctioned between 2013 - 2015. However, the Commission did not provide a firm number for this back-loading of allowances, instead explaining three different scenarios around the leaked numbers of 400, 900 and 1,200 million allowances. “It will let the member states’ experts suggest the exact volumes that would be taken out of the auctions in the coming years”, said Anders Nordeng, senior market analyst at Thomson Reuters Point Carbon. Ferdinand added, “the legal clarification will probably make the decision-making process easier and perhaps more importantly, it will remove the risk of legal challenges to a back-loading decision at a later stage”. The legal clarification could potentially be voted upon both in the European Council and in the Parliament by the end of this year. It will require qualified majority in the Council and simple majority in the Parliament.

Surprisingly, the Commission proposed no re-injection of these allowances before 2018 at the earliest, which leaves more time for the final cancellation decision to be made.

With regards to the missing number in the back-loading proposal, Nordeng explained that “this will probably not change the outcome in terms of the amount of back-loaded allowances, instead MEDIA ADVISORY

it illustrates that this will be a controversial decision and that the final figure will be the result of political compromise among key member states”. Importantly, the decision will be taken by qualified majority, so it will not be possible for one or a few countries to block an agreement on this issue.

The proposal could potentially be voted upon both in the Council and in the Parliament by the end of this year. It will require qualified majority in the Council and simple majority in the Parliament.

Ferdinand concluded, “The documents that have been tabled today have been more substantial than expected. It shows that despite some opposition to the tightening of the market, the Commission seems to be very eager to provide the signal of readiness to act. This should lift up prices in the short-term”.

Nordeng concluded, “The earliest that we predict member states could agree to a change of the auctioning regulation would be early 2013, potentially affecting auctioning volume from as early as 2013 onwards. Once that decision is made, however, the allowances set aside from the EU ETS would officially cease to exist – the EU ETS cap would be tightened.”

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Thomson Reuters Point Carbon is aleading provider of market intelligence, news, analysis, forecasting and advisory services for the energy and environmental markets.

Thomson Reuters Point Carbon will issue a second advisory on Monday, July 30 containing more detailed price forecasts for EUAs once the Commission’s proposals have been analysed in depth.