Europe's carbon conundrum

Another bruising week for the EU carbon market as uncertainty reigns; US Republicans ensure cap-and-trade is a no-go zone; Japan weighs its nuclear future and Sweden mulls a CO2 tax on meat.

The European carbon market had another bruising week, as prices plummeted 19.6 per cent between January 21 and 25 – their biggest weekly drop since they fell 21.7 per cent in June 2011. This time, the decline came after the industry committee in the European Parliament advised against a plan designed to boost emission allowances. The contract for December 2013 ended Friday's session at €4.11/tonne compared with €5.11/t at the close of the preceding week.

EU emission allowances (EUAs) dropped to an all-time low of €2.81/t on Thursday morning on news of the Parliament vote. The industry committee recommended rejecting the proposal to change emissions-trading law in order to strengthen the EU ETS. The Commission wants to delay the sale of 900 million allowances, currently scheduled for 2013-15, to 2019-20, with the aim of reducing the considerable oversupply that arose in part due to the economic crisis. But first it needs the Parliament and member states to amend the EU ETS Directive.

Last week's vote has few concrete ramifications, however, as the industry committee is only the 'opinion provider' and its view is non-binding. What it does highlight is that proponents have a fight on their hands if they want to get the backloading plan through the Parliament. The environment committee, leading the negotiations, is due to vote on February 19. Once it has reached agreement, the final version of the text will go to the plenary for a vote currently scheduled for April 15.

In the meantime, the added uncertainty will likely reduce the speculative purchasing appetite of utilities and financials, and it could increase the pressure of auctions on the already oversupplied market.

The positions of most member states remain uncertain, though Italy, Spain and France have said they support the plan while Poland is against. The UK has said it will approve the plan, subject to some conditions, and would prefer delaying the sale of 1.2 billion EUAs compared with the current proposal of 900 million.

The country with most votes, Germany, has yet to adopt a position on the plan, said officials who spoke to Bloomberg News on the condition of anonymity.

Others have made their views more clear: the Commission's plan is "absurd" and will hurt German industry by pushing up costs. This is the position of Joachim Pfeiffer, economy spokesman for Chancellor Angela Merkel's CDU party, speaking to Bloomberg News on Thursday.

Election results in Lower Saxony on January 20 delivered mixed messages for the backloading plan. Philipp Roesler, Germany's economy minister and opponent of the Commission's market plan, scored a surprising success. The FDP, the party he chairs, received just under 10 per cent of the votes – around twice as many as forecast by the polls. This improves Roesler's standing as junior partner in the coalition with Merkel.

Backloading supporters could take comfort from the razor-thin victory of the left-wing block and a 5 per cent gain for the Green Party. This may provide tailwind to the left in the federal elections in September, improving the odds that higher carbon prices may be less disputed in the next German government.

Behind the scenes of this uncertainty, the Commission, member states and Parliament are likely to be deep in discussion on how to devise a text that can be agreed on. Ultimately, the 'greener' environment committee will likely recommend that the plenary endorses the change to the EU ETS Directive, despite the position of their industry colleagues. However, they may well take the opportunity before the vote on February 19 to water down the current version, to increase its chances of passing.

Elsewhere in the world, Japan said on Friday it will announce its new 2020 emission reduction target by November. It had pledged to reduce its greenhouse gas output by 25 per cent from 1990 levels.

The government is currently reviewing its nuclear strategy after the Fukushima disaster in March 2011. Only two of its 50 reactors are operational and its emissions and spending on imported liquefied natural gas have soared as a result. Public sentiment may prevail in 2013 but in the long term nuclear is likely to remain an important generating technology in Japan, according to Bloomberg New Energy Finance analysts.

In the US, President Barack Obama's inaugural address on January 21 may have made climate change a second-term priority. But anyone expecting him to implement a cap-and-trade scheme will be sorely disappointed, as DC remains gridlocked.

However, Obama could make use of the considerable executive powers at his disposal, for example through regulations on existing coal-fired plants through the Environmental Protection Agency. He could also reject Keystone XL, a pipeline that would carry Canadian tar-sands crude to US Gulf Coast refineries. Nebraska's governor approved a new route on January 22, clearing the way for Obama's decision on the TransCanada project.

He could accomplish much of what was sought under the failed 2009 cap-and-trade legislation by rules, in part relying on authority in the Clean Air Act and a 2007 Supreme Court decision applying it to carbon emissions.

Obama has yet to nominate any of the three cabinet positions for dealing with climate issues: energy, the Environmental Protection Agency and interior. He has, however, nominated John Kerry as secretary of state – a politician with a strong track record of supporting climate action. (One of the federal cap-and-trade proposals was the 'Boxer-Kerry' bill.)

And finally – all hamburger lovers in Scandinavia's largest country may want to stock up now, as Sweden has proposed a CO2 tax on meat as a way to reduce emissions, according to newspaper Dagens Nyheter, citing a report from the Swedish Board of Agriculture.

The country has the second-highest consumption of beef in the EU, with Swedes eating an average 87 kilos of meat per person in 2012.

The tax appears to have little support elsewhere in the government, however, after finance minister Anders Borg ruled out such a levy, saying that he thought that Sweden's current CO2 tax system worked well. The Agricultural Board clarified later in the week that it was proposing a carbon tax on meat not just in Sweden but across the EU.

This article was originally published by Bloomberg New Energy Finance. Republished with permission.

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