EU votes in favour of temporarily withholding the sale of 900 million EU allowances from the EU carbon scheme

by K&L Gates LLP
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On July 3, 2013 the members of the European Parliament voted 344-311 in favour of a one-off intervention in the market to withhold the sale of 900 million EU allowances over the next few years (with the intent to return them to the market around 2020). The European Parliament will start negotiations with the European Council (the government ministers for each member state of the EU) as soon as possible to seek a common position. The final text will require approval from the European Parliament and the European Council to become law. That vote in the European Council may not take place until after the German elections (in September 2013) according to a statement made to Reuters by EU climate chief Commie Hedegaard1.

The price of EU allowances has been in decline2 for the last four years due to an oversupply of allowances resulting from the curtailment of industrial output during Europe's deep recession coupled with an inability under the Scheme rules to reduce the supply of allowances. The withholding of 900 million EU allowances seeks to redress that balance. Following the vote to withhold the sale of those allowances, the price of EU allowances jumped by 13% to 4.86 Euros. However the price has since fallen back to 4.20 Euros as of 9 July 20133, reflecting weak German industrial output data and a perceived continued oversupply in the longer term. Carbon prices at these levels will not stimulate clean energy development and so a longer-term fix is expected once the European economy improves sufficiently to cope with an increased carbon price.

The impact of this decision on greenhouse gas cap-and-trade schemes in Australia, California and Quebec will depend on the extent to which such schemes are linked to one another and to the EU ETS. In order to assist in understanding the issues that may arise from linking such schemes, we have prepared the accompanying table summarizing and comparing the salient features of each scheme.

Mandatory Greenhouse Gas Emission Trading Schemes 

The primary impact of linkage of the schemes may be price convergence among the different schemes. Should emission units issued under one scheme be accepted to acquit emissions liability under another, then prices of the various units may well converge and follow the price of units in the largest market, the EU ETS.

The Australian scheme will begin a one-way link with the EU ETS effective July 1, 20154. The link will allow a limited proportion of EU allowances and international allowances to be used to acquit liability under the Australian scheme. This partial link is being reflected already in decreases in forward contract prices for Australian carbon units and Australian energy prices.

The Californian and Quebec trading schemes will also link, effective as of January 1, 2014. On April 8, 2013, California’s Governor Jerry Brown issued a letter to the Chair of the California Air Resources Board (CARB) approving linkage of the two schemes, and on April 19, 2013, CARB itself formally approved such linkage by unanimous consent. Once the California and Quebec schemes link, we would anticipate convergence of prices in the two schemes, with California allowances driving pricing due to the much larger size of the California market.

In addition, authorities in California and Australia are in discussions regarding linking the two jurisdictions’ trading schemes. Such linkage would effectively result in linkage of all four schemes. Under such circumstances, we would expect the EU to be the ultimate price driver, given its larger size. That is not to say that we would expect the units under each scheme to have an identical price.

Differences among the various schemes — including differences in participants, industries, coverage, supply and demand, and climatic conditions — will influence the price independently in each scheme. We would, however, expect linkage to cause some price convergence among the four schemes.

Given that climate change is a global issue, it is entirely reasonable for emission trading schemes in various countries to be linked with one another so that businesses in each country will pay a similar carbon price. It is also reasonable to expect that continued low prices for carbon trading instruments will call into question whether scheme linkage is desirable, if the pricing resulting from such linkage fails to send appropriate signals for investment in greenhouse gas emissions reduction.

The authors would like to specially thank the following contributors:
Julia Smith, and Zanda Misina

1.See Reuters: Rhttp://www.reuters.com/article/2013/07/03/eu-carbon-market-idUSL5N0F91UA20130703
2.With declines of up to 70% according to Bloomber reports: http://www.businessweek.com/news/2013-07-02/eu-s-carbon-market-fix-faces-second-chance-vote-in-parliament
3.See EEX web site: http://www.eex.com/en/Market%20Data/Trading%20Data/Emission%20Rights/EU%20Emission%20Allowances%20%7C%20Spot
4.The Labour party has announced that it will bring forward the start of the cap and trade scheme if it wins the election.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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