The MSR proposal should be strengthened by filling the reserve directly with unallocated EU carbon allowances, business group IETA said on Thursday, in an effort to sway lawmakers debating the EU ETS reform.
The fate of the unallocated EUAs is one of the three key price-dependent aspects of the MSR reform – along with the treatment of 900 million backloaded EUAs and whether the reserve starts in 2021 or earlier.
IETA supports an earlier MSR start and for the backloaded EUAs to directly into it, but the group had not previously set out a firm view on the unallocated units.
“There is consensus amongst IETA members that those unallocated allowances be placed in the reserve instead of auctioning them at the end of ETS phase 3 (2020), to avoid causing additional oversupply and volatility,” the association said in an emailed note.
Under the European Commission’s MSR proposal both the backloaded and unallocated EUAs would be auctioned but spread over four years (2019-2021) rather than all in the final two years (2019,2020) if no further action was taken.
But last month the European Parliament’s voted to strengthen the MSR to start by 2019 and place backloaded and unallocated allowances directly into the reserve, withholding them from sale.
Analysts project that under such a plan, EUA prices will be more than 2.5 times higher by 2020 than current levels below €7.
GOVERNMENT DIVIDE
EU nations are yet to agree an MSR position to begin final negotiations on the bill with the Parliament. Market participants view the fate of the unallocated allowances as a critical issue, with prices falling sharply last Thursday when Latvia’s leaked compromise proposal failed to include reference to them.
The European Commission estimates there are currently around 410 million unallocated EUAs currently held in the market’s New Entrants Reserve (NER).
The total by 2020 depends on how many NER allowances are used by newly-built or expanded sites and how many allowances are returned to governments from sites that close. Analysts have different predictions for that number, ranging from 376 million to 900 million.
IETA is concerned about the risk of price volatility due to doubts over the eventual total, as well as the overall addition to the surplus from the added sales.
“Market participants need a predictable outcome from the MSR discussions that clarifies how unallocated allowances will be treated at the end of phase 3,” IETA said.
RINGFENCED PERMITS
The group added that any further debate about how the unallocated EUAs are eventually used could be dealt with at a later date if they remain identifiable while in the MSR.
“There may be some merit in some of these considerations but they should form part of the negotiations on the upcoming EU ETS revision,” IETA said.
The EU Parliament wants to earmark 300 million allowances from the MSR to be later sold to raise funds towards breakthrough industrial clean technologies and some industry groups want unallocated allowances from factory closures to be ringfenced because they were originally designated to be part of free allocation.
IETA has around 140 members including industrial companies and utilities regulated under the EU ETS, as well as financial and trading houses and other firms providing services around emissions trading markets.
By Ben Garside – ben@carbon-pulse.com
