January 19, 2014 5:00 pm

European Commission resists calls for carbon ‘central bank’

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The European Commission has resisted calls for a carbon “central bank” to revive Europe’s moribund emissions trading system but is poised to unveil a less ambitious plan to fix flaws in a market that has foundered since the global financial crisis slashed prices.

Europe’s cap-and-trade system is the world’s largest – covering more than 11,000 power stations and factories, which have to buy extra allowances if they want to increase carbon output above their limits. It was intended as a global standard that would encourage countries to cut their greenhouse gas emissions and invest in clean technologies. But the economic crisis and a glut of carbon allowances, or credits, have undermined the market. The carbon price has plunged to about €5 per tonne from nearly €30 per tonne in 2008, a level that has only encouraged energy companies to burn more coal.

As an interim measure, the EU is delaying the addition of carbon allowances to the market, a process called backloading. But traders have sought assurances that the commission will devise a longer-term fix for structural flaws in the system, particularly when the delayed credits flow back into the market in 2019 and 2020.

EU officials have rejected setting up a carbon “central bank”, in which a regulatory board would have assessed the market before intervening. Instead, the commission will set out a legislative proposal on Wednesday for an automated “stability reserve” of permits.

According to a draft of the plan, the reserve would start in 2021 and would track market volumes and withdraw or add allowances at certain trigger points that suggested over- or undersupply. The reserve would calibrate liquidity automatically, at mathematically defined volume levels.

The move comes as part of the commission’s keynote package of emissions and energy targets for 2030, which are intended to rebuild the credibility of the EU as a leader on environmental issues.

Critics argue that more immediate measures are needed to repair the market over the next seven years. Joris den Blanken, EU climate policy director at Greenpeace, said 2bn carbon allowances should simply be cancelled. In 2011, about 8bn allowances were traded.

“On its own, the stability reserve will not restore confidence in the carbon market. Only straightforward cancellation of surplus carbon emission allowances and strict 2030 targets can make the carbon market a driver for green investments,” he said.

However, Luca Taschini, a research fellow at the London School of Economics, said the reserve was something of a “quantum leap”, given the complexities of reforming the system, and would show the EU was serious about the market’s future.

“Psychologically, the European Commission has indicated that it is considering changing the parameters of the game,” he said. “It’s a good starting place.”

Traders also say the market is expected to respond to the show of intent from the EU. Bloomberg New Energy Finance predicts that European carbon prices will rise 50 per cent this year.

Some economists and market analysts have called for stronger triggers for intervention, saying allowances should be removed or added in line with price trend fluctuations or even shifts in gross domestic product. Mr Taschini said gross domestic product was likely to be an inefficient trigger as data would be released with a delay that would make the measure unsuitable.

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