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The European Union's 54 billion- euro ($71 billion) carbon emissions cap-and-trade system may be undermined if the bloc's Parliament votes against Climate Commissioner Connie Hedegaard's temporary rescue plan tomorrow.
The strategy, known as backloading, would delay the issuing of some new permits under the EU emissions trading system, or ETS, which imposes pollution limits on about 12,000 power plants and factories across the region. The euro area's recession has cut demand, exacerbating a glut that drove prices in the world's biggest greenhouse-gas market to a record low in January.
Hedegaard says the low cost of the allowances erodes the incentive for polluters to invest in climate protection technology. Opponents including the government of Poland, which is Europe's third-biggest carbon emitter, and BASF SE (BAS), the world's largest chemicals maker, say the plan will raise energy costs, manipulate prices and undermine investors' confidence.
"It's possible to be serious about climate and the environment and not harm your economy," Hedegaard said in a March 27 interview in Brussels. "I would have told you half a year ago backloading is a no-brainer, everybody will understand that you can't continue to overflood a market that is already overflooded. Now this has become extremely political."
Hedegaard, 52, a former Danish TV journalist and the Scandinavian country's first climate minister, says her role is to "think beyond the crisis." She says backloading would be an exceptional measure before Europe agrees on a longer-term overhaul of its eight-year-old carbon market.
Parliament Divided
"If we only think for the short term, we're not doing our job," said Hedegaard, who became one of the EU's 27 commissioners in 2010. "Despite the economic crisis, there has been the willingness to move forward and to take the climate change challenge seriously."
The European Commission's emergency plan consists of a change to emissions-trading law that the Parliament will vote on tomorrow, and a separate measure detailing the backloading process that will be decided later. Without approval from member states and the assembly, which is split on the proposal, the commission can't tackle the glut of permits that swelled to about 1 billion metric tons last year, or a half the average annual pollution limit in the ETS.
Market Fate
The ETS is the bloc's main tool in meeting greenhouse gas- reduction targets, which it does by issuing companies with tradable permits that they must surrender to cover their emissions or pay a fine. While cap-and-trade programs are gaining favor in countries including Australia and South Korea, U.S. legislation for a market stalled in 2009 even with support from President Barack Obama.
The commission's draft fix involves delaying the sale of permits covering 900 million tons of emissions over the next three years and reintroducing, or backloading, them to the market in 2019 and 2020.
The outcome of the April 16 vote may determine the fate of the ETS for the next several years, according to Bloomberg New Energy Finance.
"That will be a test for the credibility of the Parliament," said Peter Liese, a German member of the European People's Party in the EU assembly. "Hedegaard did the best possible job. She's a good negotiator and a tough politician, others would have failed much earlier as there's a lot of resistance against climate policies."
Liese, part of a pro-backloading minority in the EPP, is concerned the failure of the rescue plan may prompt the bloc's governments to start implementing their own climate measures, marginalizing the common emissions market.
Bad Signals
A no vote will also send "a bad signal internationally" as nations worldwide discuss global carbon-reduction goals for after 2020, said Bryony Worthington, founder of climate lobby Sandbag.
"Hedegaard has a very difficult job at the moment," Worthington said in an interview in Brussels. "She has to fight quite hard, even among her own people, because the commission, as usual, is split on climate ambition."
Permits in the EU's trading system slumped to a record-low price of 2.81 euros a ton in January from an all-time high of 31 euros in April 2006 as a recession curbed demand for emission rights.
A vote in favor of backloading may boost carbon prices to as much as 8 euros a ton, Sabine Schels, an analyst at Bank of America Corp. in London, said in a research note dated April 9. Allowances for delivery in December traded at 4.84 euros a ton at 3:40 p.m. on London's ICE Futures Europe exchange.
Investors need a sign of political confidence in the ETS, or the market may be "completely undermined," according to the International Emissions Trading Association. Backloading is needed to buy time before a deeper overhaul, which is unlikely to happen within the next four to five years, said Sarah Deblock, a Brussels-based EU policy director at the lobby group.
A majority of the EPP party, the biggest political group in the European Parliament, disagree with IETA. The EU is on course to meet its emissions-reduction goal and market intervention will hamper the economic recovery, EPP members Lena Kolarska- Bobinska, Alejo Vidal-Quadras, Amalia Sartori and Herbert Reul said in a letter to Hedegaard on April 10.
"Backloading undermines the trust in the market when we need investment certainty," Wolfgang Weber, who oversees BASF's EU government relations in Brussels, said on April 9.
Serious Threat
Poland's Environment Minister Marcin Korolec disagrees with his counterparts in countries including Germany and the U.K. who say eight years of climate action will be lost without backloading.
"What creates a serious threat for the existence of our most cost-efficient climate-policy instrument is precisely undermining its market character by political intervention through backloading," Korolec said by e-mail.
The controversy over the carbon market rescue plan highlights the underlying problem of the EU emissions system, which is the lack of flexibility and the complexity of the decision-making process in the 27-nation bloc, according to Paolo Coghe, an analyst at Societe Generale SA in Paris.
Europe's pollution-reduction cap for 2013-2020 was set before the economic crisis and stepping it up would require a legislative process that usually takes at least two years. Its carbon market doesn't have a price floor or ceiling.
"It's not about the price just being set at 5 euros or 50 euros," Coghe said. "It's obvious that if the price is 50 euros people will think twice before they burn coal instead of gas and this will provide the drive to achieve long-term policy objectives."
Hedegaard, who became the youngest member of the Danish parliament in 1984, believes that climate-friendly policies will create new jobs and help cut the EU's fuel bill by encouraging companies to invest in clean technologies.
"There will be different situations in different member states," she said. "You can't have a one-size-fits all. But I think we can do what we also did in the last climate and energy package, you can try to have different effort-sharing."
