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European Parliament endorses carbon set-aside option

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The European Parliament is poised to signal support for the option of withholding some carbon permits to bolster prices after political parties in the assembly reached a compromise tied to draft energy legislation.

Carbon allowances surged as much as nine per cent to an eight-week high after parliament industry committee members representing all the parties proposed amending a planned energy efficiency law by saying that the should put forward, “if appropriate,” measures that “may include to withhold the necessary amount of allowances” from auctions.

“It’s a balanced compromise,” , a German Christian Democratic member of the EU Parliament who helped broker the accord, said in an interview on Thursday in Strasbourg, France. “There was agreement with representatives of all the parties.”

At stake is the price of CO2 in the world’s biggest cap and trade programme, which since its debut in 2005 has covered more than 11,000 energy and manufacturing companies in Europe and this year expanded to include airlines worldwide as well. EU emission permits dropped to a four-year low last month because of oversupply, triggering calls by environmental groups and investors including Plc for the EU to strengthen the system.

EU carbon allowances for delivery in December erased earlier losses and traded 7.7 per cent up at Euro 9 on the ICE Futures Europe exchange as of 3.25 pm in London. The contract rose to as high as Euro 9.11 from an intra-day low of Euro 8.1 on speculation that the accord on Thursday will encourage the commission to propose a set-aside regulation.

Energy efficiency legislation
The industry committee, also known as ITRE, is due to vote on February 28 in Brussels on the amendment agreed on Thursday, which will then go to the full EU assembly for approval. The proposal also will need the support of EU governments when they vote on the energy efficiency legislation.

The agreement in the industry committee makes it “very likely” that some allowances will be withheld by the early years of the next phase of the emissions trading system that starts in 2013, Konrad Hanschmidt, a carbon markets analyst at Bloomberg New Energy Finance in London.

It “will provide a sign of support of the set-aside for the European Commission, which is essential if the commission were to initiate separate proposal to withhold allowances,” he said in an email.

The Climate Markets and Investment Association and the German Emissions Trading Association, or BVEK, said in a joint emailed statement that they want “decisive action” from the bloc’s lawmakers to take surplus allowances out of the market.

“BVEK states that in the event of EU failing to take action, in Germany alone more than half of the investment needed to maintain a low carbon pathway will no longer be economical,” according to the statement on Thursday.

The ITRE vote later this month will follow a decision by the Parliament’s environment committee last year to back an amendment calling on the commission to set aside a “significant number” of allowances, which sent carbon permits as much as 32 per cent up on December 20. The environment committee recommended ITRE, whose vote will be seen as a recommendation for the full assembly, also back a set-aside of allowances.

Even if adopted, the amendment on withholding permits won’t automatically lead to a set-aside of allowances. That would require a separate draft measure to be presented by the commission and backed by EU governments, which remain divided over the need for more stringent climate policies.

‘Ambiguous issue’
“It’s an ambiguous issue; on the one hand it would tighten supply now and lead to higher prices,” Georg Zachmann, researcher at the Bruegel institute in Brussels, said by phone. “On the other hand, it creates uncertainty because it will use a short-term political tool in the system that was designed to be long-term.”

EU governments aren’t certain whether the draft energy efficiency law should refer to the option of withholding permits from the carbon market, an EU official said on Feb. 13.

The commission, the 27-nation European Union’s regulatory arm, has repeatedly said it needs a “political decision” to come forward with a proposal on the set-aside. While political encouragement for the commission to draft regulations traditionally comes from national governments, diplomats have signaled it’s unlikely that an upcoming meeting of the environment ministers on March 9 will give the commission the green light to propose new tools.

Political statement
Poland, which last year blocked a political statement on climate goals, is ready to veto for a second time ministerial conclusions should other nations push for a reference to stricter climate policies, newspaper Gazeta Wyborcza reported on February 11, citing an unidentified government official.

European carbon permits lost 42 per cent from a year ago on concern that new energy savings measures in the law the parliament is currently debating will erode demand for permits to discharge greenhouse gases, further boosting oversupply.

The EU emissions trading system, or ETS, was valued at $120 billion last year. Analysts at Bloomberg New Energy Finance predict that in the current trading period from 2008 to 2012 the ETS will be oversupplied by around 1.1 billion metric tonnes, worth Euro 8.5 billion at on Thursday’s prices. This surplus may be transferred into the next stage, or the so-called third phase, from 2013 to 2020.

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