The European Commission aims to bring forward a proposal for agreement by member states by the end of the year to tackle the oversupply of carbon allowances in the EU Emissions Trading System (ETS).
At the informal meeting of Environment and Climate ministers in Horsens, Commissioner Hedegaard made the following statement on the state of the European carbon market: "We are now rapidly approaching the start of the third phase of the European carbon market. Major changes will apply as of next year to the regulatory underpinning of the EU ETS. 2012 marks the final preparations for the transition to the new rules. Our regulatory work over several years has aimed for a smooth transition into phase 3. Difficult and unexpected macroeconomic circumstances arising from the economic and debt crisis complicate this aim, as they have substantially altered the supply-demand balance in the European carbon market for the early years of phase 3. I have therefore asked my services in DG Climate Action to bring forward the first annual report on the ETS. This report is envisaged by the ETS Directive in 2013, the first year of phase 3, but I have asked for it to be prepared already now. This offers an opportunity to include a review of the auction time profile. Based on this annual report, I will consider bringing forward a proposal to the Climate Change Committee for decision this year."
According to the IETA, there are downsides associated with the measure as it represents a form of market intervention and introduces new political risks as to further interventions to an already volatile environment. It is also only a temporary solution, as the allowances withdrawn will have to be released back to the market within the relevant phase unless the cap is changed to allow for permanent cancellation.
It will be very important to clarify how/when allowances are going to be put back to the market and to situate the set-aside firmly within the debate about longer term targets.
IETA considers that to rebuild confidence, a system reform is needed, including (i) legislation to change the cap trajectory to align mid-way climate targets with 2050 objectives; (ii) a revision of the cap setting process to ensure the intended relationship between the cap and business‐as‐usual emissions continues.