EU carbon market reforms likely to kick off in 2017

Reforms to reduce a glut of emissions in Europe’s carbon market look increasingly likely to kick off in 2017, four years earlier than initially proposed.

Bringing forward the plan to take hundreds of millions of surplus permits out of circulation has the backing of Germany and Britain, as well as major energy companies such as Britain’s SSE and Drax and Sweden’s Vattenfall.

These firms fear that in the absence of a strong EU-wide carbon price, countries will start introducing domestic legislation to curb emissions, creating uncertainty about future carbon costs.

The EU’s Emissions Trading System (ETS) is the bloc’s flagship policy to cut greenhouse gas emissions by charging for the right to emit carbon dioxide, but weak economic growth across Europe has cut industrial production and energy demand, creating a glut of more than 2 billion permits.

Prices for EU allowances (EUAs) have plummeted to less than 7 euros ($9) a tonne from almost 30 euros six years ago, leaving the market too weak to spur a switch to low-carbon technology.

To boost prices, the EU plans to take hundreds of millions of surplus EUAs out of the market from 2021 and place them in a Market Stability Reserve (MSR). It would put them back into circulation if demand rises.

“With the support that the German amendments are getting from other member states, I would still expect the MSR to have an accelerated start date of 2017,” said Mark Lewis, analyst at Paris-based financial services group Kepler Cheuvreux. EUA prices could treble from current levels to 21 euros a tonne by 2020 if the MSR starts in 2017 and backloaded permits are placed into the reserve, Trevor Sikorski, an analyst at London-based consultancy Energy Aspects said. If the MSR starts in 2021 and backloaded permits are placed in the reserve, prices are likely to only reach 10 euros by 2020, he added.