A  Commission draft report on the EU ETS scheme presents options ranging from creating strong price signals to investors and thereby preserving the market-based character of the ETS to setting up price management mechanisms in order to correct the price and beef up the system.

Delaying auctions – first step on the way to more renewable and clean coal investment?

It’s important to underline that the back-loading will not affect the overall volume of allowances to be auctioned in the 3^rdphase only the distribution of auction volumes over the period from 2013-2020.  While delaying auctions is a good first move a more permanent solution must be decided upon in order to re-establish a strong price signal and consequently encourage investment decisions in the power sector both for clean coal and innovative renewable technologies.  The Energy Roadmap 2050 foresees substantial rises in renewable energy and Commissioner Oettinger announced a serious discussion within the Commission on binding renewable energy targets for 2030 to start by the end of this year already. Current low CO2 prices do not encourage investment decisions neither in innovative renewable technologies nor in the CCS technology, which is essential if gas is to have a role as a transitional fuel in short term. Therefore, Bellona will strongly support new binding goals on renewable energy and on cutting carbon emissions through permanent removal of allowances. 

Adjustments to the volumes of allowances to be auctioned in 2013-2020  

In July the Commission floated  three options to correct the ETS price, which was projected to cost well above € 20 at this point; delaying the auctioning of 400 million, 900 million or 1.2 billion credits. A precise figure was however not attached to the first draft of the amendment to the Auctioning Regulation to the Climate Change Committee. The figure of 900 million allowances has been proposed in the light of views expressed by Member States and stakeholders during the public consultation – the process which was closed on 16 October.

The Commission also proposed a minor amendment to the ETS Directive that aims to clarify that the timing of auctions within a trading period may be changed by amending the Auctioning Regulation ‘’in order to ensure the orderly functioning of the carbon market” (COM(2012) 416).The amendment may be seen as controversial because it gives the Commission the power to intervene in the carbon market with the approval of a working group of Member States’ representatives, but only with limited right of scrutiny by the Parliament and the Council.

Positive impact of higher carbon prices on investment decisions – short and long term  

• Long term: higher carbon prices would have positive influence on required additional funding (since it will lead to increased government revenue from auctioning) to make a new coal-fired plant investment with carbon capture and storage (CCS) as profitable as one without the CCS.

• Short term: it should be underlined that a strong carbon price signal not only benefits low carbon investments with long lifetimes but it also increases the value of allowances auctioned in the short term. 200 million allowances from the EU-wide new entrants reserve for phase 3 that are available to stimulate the construction and operation of large-scale demonstration CCS projects will already be sold in 2012. However, the remaining 100 million allowances are to be sold by the end of 2013. This means that every €1 increase in the carbon price in 2013 will lead to a €100 million increase in revenue available for CCS and innovative RES projects.

The risk is that if the revenue from the NER300 remains low, a lot of low carbon investment will not come to the market, or will need greater support by governments when at the same time the government revenue from auctioning will also be lower than initially expected.

The draft Decision still requires approval by the European Parliament and Council, but the good news is that Connie Hedegaard confirmed yesterday at the extraordinary meeting in the ENVI Committee of the Parliament that the Commission will go ahead with the examination of the back-loading amendment anyway, while noting that the Commission will wait for the final adoption till the approval of the decision amending the ETS directive by the Parliament and the Council.

“We hope that the back-loading proposal will be adopted by the end of the year in spite of the Parliament attempts to delay the whole process. Failure to act before the end of 2012 will keep the investments on hold”, continues Frisvold.

Similarly, Bellona expects strong measures to be proposed on Wednesday in the Carbon Market report. The report will present a set of options for long – term structural measures; according to a draft (leaked in press), the Carbon Market report will suggest six possible options:

1) permanent removal of the ‘back-loaded’ credits (up. to 2.2 bln);
2) a higher 30% emissions reduction target for 2020;
3) limited use of international Kyoto Protocol credits in the ETS;
4) tighter annual ETS caps;
5) expanding the ETS to new sectors;
6) setting up price management mechanisms.

Bellona supports the options 1-5 since they will result in strong price signal for investors and will preserve the market-based character of the ETS.  The last option however is more of a market intervention since it could involve setting up a reserve where allowances can be temporarily stored when there is a decrease in demand; or setting a carbon floor price a measure already introduces unilaterally by the UK, which serves as an example of a risk of nationalization of climate polices resulting from lack of EU action.

The price management option is not advisable since it will have an impact on the credibility of the system and the legal certainty for investors – the stakeholders representing the energy intensive industries already (chemicals, steel, metals, glass, paper and petroleum industry associations) argue less about the numbers than about the decision to intervene as such which “will result in higher costs, destabilize the ETS market and have a negative impact on legal security for investors”, concludes Frisvold.