EU should return allowances near phase 3 end — Ieta

London, 9 October (Argus) — The European Commission should return back-loaded EU emissions trading scheme (ETS) allowances in the latter years of the scheme's third phase, the International Emissions Trading Association (Ieta) said today.

“An early return date would weaken the effect of this measure,” Ieta said in a letter to the commission. “Returning all allowances in a single year seems however a risky strategy as the price crash from the sharp increase in supply could be severe.”

Back-loading a higher volume in 2013 and lower volumes in the subsequent years is preferable to back-loading equivalent volumes each year, Ieta added. “2013 is for several reasons better supplied than subsequent years and this would also send a stronger signal of political determination,” the association said.

It is important to implement the back-loading proposal as a short-term measure to address oversupply, according to Ieta. But this measure faces severe obstacles, the group cautioned. “A great deal of political capital will be expended to secure agreement on back-loading,” it said.

The negatives of a surplus
The commission must also consider broader EU ETS reforms to prevent the build-up of extensive oversupply, Ieta emphasised. The current surplus of allowances puts at stake the political viability of the EU ETS, Ieta noted. An institutionalised adjustment process could help to prevent these types of problems in the future.

“Ieta believes that the market works best if supply can also adjust to changing economic circumstances in a transparent and predictable manner that operators can anticipate, and which removes the need for ad hoc intervention,” the association said.

Policy makers also need to adjust the EU-wide emissions reduction target to address the gap in long-term climate ambition, Ieta added.

There is also an overlap of several policy instruments for reducing CO2 emissions, which has created a co-ordination problem, Ieta said. Mandatory energy efficiency measures and renewable energy targets create a need for policy interventions to adjust the schemes' baselines when higher than expected reductions occur.

Ieta highlighted several reform options that it wants the EU to consider to address these issues. Reform options include a permanent set-aside, an auction reserve price, changes to the cap, additions of new sectors to the scheme, and a carbon bank to deal with oversupply and undersupply. “In the short term, the commission's implementing powers are restricted by the terms of the ETS directive… [but] in the mid to long term, a wide range of additional measures can be envisaged,” Ieta said.

“The discussion on back-loading has created important momentum for reform, which will be critical for advancing beyond political battles towards real solutions,” Ieta chief executive Dirk Forrister said.

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