Thanks to the recession, the EU ETS has a massive oversupply problem. A new report by Sandbag suggests that as many as 3.1 Gt should be removed from the system.
The most straightforward approach would be to strengthen the EU emission reduction target from 20% to 30%, but thanks to Poland that is currently not possible. A second-best option would be to cancel the surplus allowances, but that is also currently not possible. The fallback option is therefore to delay the auctioning of allowances, often referred to as set-aside or backloading. The benefit of this option is that Poland on its own could not block such a relatively minor change.
Reuters reports that the Commission will publish details of a review of the EU ETS, including the set-aside, before the EU institutions’ summer break in August. Observers think that the proposed set-aside may range from 700 million to 1.2 billion.
The benchmark carbon price fell to a low of 5.99 euros per tonne in April. It has since recovered to around 8 euros, partly because of expectations the Commission will act to support it.
The carbon price needs to be in the 18-20 euro range for it to start spurring low-carbon investment, Mark Owen-Lloyd, head of carbon trading at CF Partners in London, said.
“You’ve got to get the price out of the 6 to 8 euro zone; otherwise it’s just a play thing for traders,” he said.