:: CARBONyatra.com ::

The proposed Energy Efficiency Directive published by the European Commission in June is currently being considered by the EU Parliament as part of the tripartite Co-Decision process necessary for it to become law (then the Directive will go to the Council of Ministers).

As a prelude to the plenary vote next April, the Environmental Committee (ENVI) of the Parliament today voted on a number of amendments to the proposed Directive, and we think today's sharp increase in Dec-12 EUA prices mainly reflects the market's reaction to two of these amendments in particular, which, if ultimately implemented, would reduce the supply of EUAs beyond 2012: (i) allowing for a set-aside of 1.4bn allowances, and (ii) a tightening of the annual linear-reduction factor to be used to calculate the ETS cap from 2014 (to 2.25% from the existing 1.74%).

Today's vote was only the first step of the parliamentary process, given that the industrial committee (ITRE) -- which is actually the lead Parliamentary Committee on this Directive rather than the ENVI -- will make its position clear in late January 2012 prior to the plenary vote in April, but with EUAs now financial options on policymakers' political will to tighten the ETS cap (see our report What Is the Value of a Political Option?, 29 November 2011), this first step is an important development.

We would emphasize, however, that while we see encouraging support in the Parliament for the general concept of a set-aside, we do not think the specific figure of 1.4bn is likely to be approved by the ITRE in January (nor, as a result, by Parliament as a whole next April), nor do we think the idea of tightening the linear-reduction factor from 2014 will necessarily be approved by the ITRE or the full Parliament either.

This is because while the ENVI voted overwhelmingly in favour of the general concept of a set-aside, the amendment proposing the specific number of 1.4bn passed by only one vote, and the amendment on tightening the linear-reduction factor by only two votes. Given that the ENVI is typically the strongest supporter of tougher environmental legislation, we would expect these two amendments to run into greater opposition in the ITRE.

Nevertheless, today's vote is clearly a positive first step towards creating a legal basis for tightening the EU-ETS cap and should thus underpin the option value of EUAs ahead of the next stage in this process, which will be the ITRE vote.