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Market ‘naïve’ to expect timely EU ETS fix details – analysts

Carbon traders have been overly optimistic in expecting detailed proposals from the European Commission on how to deal with the oversupply of EU allowances (EUAs), according to analysts.

On Wednesday, a long-awaited announcement by the Commission on ‘backloading’ the Phase III (2013-20) auctions of carbon allowances is expected.

EU Climate Action Commissioner Connie Hedegaard has said the Commission will propose withholding some allowances from auctions 2013-14, and introducing them later in the Phase, while also setting out longer-term structural reforms.

However, prices have crashed since Tuesday, on unsourced reports that the announcement will not contain any firm numbers, and that reforms could take longer than anticipated. Prices dropped almost 7% on the day, to €7.15 ($8.76) from €7.68 and have continued to plunge, trading at €6.71 when this article went to press.

“We don’t expect that there will be a fixed number,” said Tom Greenwood, analyst at research firm IDEACarbon in London. “We actually never expected a fixed number at all” at this point, he said.

“The Commission proposes things and then it gets debated on in [the European] Council. The idea that the Commission would have proposed a fixed number and that it would have been accepted is a bit naïve and a misunderstanding of how EU policy gets shaped,” he added.

Kris Voorspools, Brussels-based analyst at 70Watt Consulting, said that a lack of detail in the proposal would not be surprising. “If you look at market prices, I’m under the impression that people are sometimes a little bit too hopeful.”

“I expect [the Commission] to publish a document laying out basic ideas or groundwork for potential backloading of auction volumes, without concrete figures but probably with some general rules,” said Ingo Tschach, managing director of the Karlsruhe-based analysis firm Tschach Solutions.

“I expect the Commission to discuss with the relevant stakeholders, parliament and council the figure over the next couple of months … and, in the base-case scenario we expect clarification of the directive in December and the auction revision to become [law] next year,” he added.

The leak of information regarding the proposal also disappointed the market because it suggested that any changes to the timing and quantum of allowance auctions in Phase III would require an amendment in the EU ETS directive – potentially a lengthy legal process.

“I don’t think it’s going to take forever, though,” said Greenwood. “Fundamentally, a temporary backloading is not something that should cause massive problems,” he said.

He added that an agreement on a figure in six months or so is “not unreasonable”.

“All negotiations in the carbon market have led to a situation of larger oversupply,” said Voorspools. “Every measure is overcompensating for something – even if some allowances were removed then someone else would try to negotiate higher benefits.”

By Elza Holmstedt Pell
Environmental Finance

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