European wind-energy producers joined Germany and Denmark in urging the European Union to start a reserve to automatically tighten supply of emission permits in 2016, five years earlier than proposed.
The European Wind Energy Association also urged the EU to allow putting a bigger number of allowances in the proposed reserve to bring a record surplus of permits in the market down faster, according to its position paper. To ensure scarcity in the world’s biggest cap-and-trade program, the lobby advocates permanent cancellation of excess allowances before the start of the next trading phase in 2021.
The EU’s 28 nations began talks last month on the draft measure to introduce a market-stability reserve for the $72 billion Emissions Trading System, the bloc’s key policy tool to combat climate change. The plan to begin automatic supply curbs or injections to avoid imbalances requires qualified-majority support from governments and majority backing from the European Parliament to be amended and take effect.
“If a high power price is realized only after 2021, the ETS will have no impact on investment decisions in the power sector before then,” according to EWEA, whose members include Alstom SA (ALO) and Vestas Wind Systems A/S. (VWS) “The EU could lose its technology leadership in renewables and become locked into high-carbon assets.”
The stability reserve plan was proposed in January as part of a strategy on climate and energy policies for 2030 and aims to strengthen the carbon market after prices tumbled to record lows earlier this year amid oversupply. The ETS, started in 2005, imposes decreasing pollution caps on about 12,000 installations owned by power producers and manufacturers including EON SE (EOAN) and ThyssenKrupp AG. (TKA) Each year they must surrender enough permits, which they get for free or must buy at auctions, to account for their discharges or pay fines amounting to 100 euros ($138) a ton.
The cap-and-trade program had an excess of about 2.2 billion allowances at the end of last year, according to European Commission estimates. Coupled with an economic crisis and inflows of cheaper imported emission credits, the surplus helped drive the price of EU carbon allowances to a record low of 2.46 euros a ton in April. The permits rose 1.4 percent to 6.01 euros on the ICE Futures Europe exchange as of 2:15 p.m. in London today.
The supply of permits will be reduced if there is an accumulated surplus of at least 833 million metric tons, according to the draft law on the stability mechanism. If the surplus fell below 400 million tons, the EU would begin returning allowances to the market from the reserve, a provision that EWEA opposes.
The wind lobby group called for a removal of the rule on re-introduction or at least additional barriers for a return of permits, for example through a combination of more stringent volume and price thresholds, according to the position paper. It also seeks an amendment to the provision on reducing supply.
“With the commission’s proposal for taking 12 percent of all allowances in the circulation and with a surplus of 2 billion tons, only 240 million is taken into the reserve,” it said. “EWEA calls for a more ambitious and a considerably higher percentage than 12 percent.”
EU member states were split on the proposal by the commission, the EU executive in Brussels, in their first debate about the future climate and energy framework during a March 3 meeting of environment ministers in Brussels. Nations including Germany and Denmark advocated early implementation of the mechanism, while six central and east European countries led by Poland urged more analysis of the plan’s effect on the economy.
To be approved by member states, the draft law will need 260 out of 352 government votes in the EU weighted-ballot system, under which Germany has 29 votes and Poland 27. The measure was designed as a permanent mechanism to follow the EU emergency market fix known as backloading, which will withhold 900 million allowances at auctions between 2014 and 2016 and return them to the market in 2019-2020.
While backloading will provide short-term relief, the oversupply will swell to 2.6 billion permits after the backloaded permits are reintroduced, according to EWEA. Surplus allowances should be permanently canceled before the start of the next trading period in 2021, it said, urging scarcity in the cap-and-trade emissions program to provide a level playing field for renewable energy technologies.
“Only with a robust reform, including an early implemented market stability reserve and a removal of surplus allowances, EU decision makers can restore full confidence in the EU ETS,” EWEA said. “Anything else would be too little, too late.”