European Commission proposes EU ETS ‘back-loading’ reforms

On Wednesday 25 July, the EU Commission proposed changes to the EU ETS which, if approved, will empower the Commission to take measures to stabilise the flagging price of EU emissions allowances (“EUAs”). The Commission’s proposal is to amend Directive 2003/87/EC (the “EU ETS Directive”) and Regulation 1031/2010 (the “Auctioning Regulation”), to permit it to adapt the current EUA auction schedule, by “back-loading” auctions of EUAs to the later years of Phase III of the EU ETS (2018-2020 or 2020 only). The amendments, the Commission says, are intended to promote the orderly functioning of the EU ETS and provide consistent price signals throughout Phase III, rather than to inflate the price.  

The proposed amendment to the Auctioning Regulation would involve the set aside of allowances from auctions planned during the first three years of Phase III, which will then be added to the auction volume in the later years of Phase III. The quantity of allowances to be set aside will be determined after further review. However, as indicated by a staff working paper, the number is likely to be either 1.2, 0.9 or 0.4 billion allowances in total.

In addition, the Commission proposes to amend the EU ETS Directive to permit adaptation of the EUA auction timetable. The proposed amendment suggests that changes will only be made in exceptional circumstances, in order to ensure the orderly functioning of the market. The circumstances justifying such intervention are not yet known, but documents released by the Commission suggest this will be warranted in “situations of artificial and large temporary imbalance”.

The proposals will now proceed through separate EU legislative processes and in the case of the proposed amendment to the Auctioning Regulation, following consultation and publication of an impact assessment. The Commission intends to amend the EU ETS Directive before the beginning of Phase III (1 January 2013) and the Auctioning Regulation as soon as possible. Given the schedules of the relevant EU institutions involved however, amendments to the latter may only occur in the early part of 2013.  

Although some analysts have adjusted their long-term price outlook upwards, the announcement initially had a negative impact on the market price, attributed in part to the lack of certainty around the volume of set aside.