EC toughens up for next phase of emission trading

Source: Budapest Business Journal, October 16-22, 2006

European Union regulators last week threatened lawsuits against eight nations, including Hungary, for failing to draft new carbon-dioxide emission caps for big emitters under the EU’s emission trading scheme (ETS). The other countries that received warning letters are Austria, the Czech Republic, Denmark, Italy, Portugal, Slovenia and Spain.

The European Commission (EC) last Thursday pressed the countries to submit plans for allocating carbon-dioxide emission permits to power plants and factories from 2008-2012. Member states originally had a June 30 deadline for handling in their proposals, which require approval from the EC. The commission said in a statement that it attaches ”high priority” to deciding on all allocation plans by the end of the year.

The commission’s rulings on the allocation plans will be the first since CO2-permit prices collapsed earlier this year when it emerged that companies had a surplus in 2005. Existing caps cover an initial period of the ETS from 2005-2007, and the commission has vowed to be ”tough but fair” with member states when deciding whether to scale back allowance grants for the 2008-2012 period.

Under the ETS, the 25-nation bloc imposes CO2 quotas on 11,400 company-owned power plants and factories, and includes such giants as German utility E.ON AG and Hungary’s Mol Nyrt. Businesses that exceed their limits must either buy permits from companies that emit less, or pay a penalty.

The ETS is the result of EU effors under the global Kyoto Protocol to reduce greenhouse gas emissions by 8% during the 2008-2012, compared to levels recorded in 1990. The trading system targets CO2 because it is regarded as the main greenhouse gas.

According to Edit Kiss, an analyst at Vertis Environmental Finance, Hungary’s draft allocation plan for the next ETS phase has been complated, and it is expected to be open for a 30-day public debate within a few weeks. ”After the debate, the final version of the draft will be submitted to the EC for approval,” – she said.

Officials from the Economy and Transport Ministry (GKM) did not respond to the BBJ’s questions by the publishing deadline. Among possible causes of the delay in the drafting process, Kiss suggested that authorities are trying to take into account the surprising emission figures from 2005 – which were released in May 2006. ”Verified emission figures in Europe for 2005 showed significant over-allocation of emission quotas, which came as a surprise to a market that expected under-allocation,” – Kiss said.

According to Kiss, while the market expected under-allocation of between 60 million and 100 million tons of CO2 quotas for 2005, verified emission data released last spring showed instead that there was over-allocation of between 75 million and 150 million tons. The total CO2 emission for 2005 was 2.1 billion tons.

In Hungary, the difference between allocations and actual emissions was 5 million tons. The average amount of annual credit that the Hungarian state allocates to affected firms during the first phase of the ETS is 32 million tons.

”The degree of European over-allocation was so shocking to the continent’s emission credits died from around €30 to €8 after the verified emission figures were announced,” Kiss recalled.

According to Kiss, some analysts predicted that carbon credit prices would go down to zero due to the over-allocation, but this was not the case.

”Although there was general over-allocation in the EU as whole, some of the big energy firms didn’t get enough quotas, so they had to keep buying from the market,” Kiss explained. ”That kept the market alive.” After some fluctuation in May, carbon credit prices stabilized at around €15 until July, when the Polish register of carbon credits was launched.

”Poland reported significant over-allocation of emission credits, so when the Polish quota register was officially launched in July, market palyers expected these credits to flood the market,” Kiss said. ”In response to these expectations, the average price of emission credits fell to around €12, and it has stabilized at this level since then.”

As for the main principles of Hungary’s second-phase national allocation plan, Kiss said that no major differences from the first one are to be expected. ”Unlike some countries, such as France and the U.K., that want to extend the ETS scope to a larger number of emitters, Hungary does not plan to do so,” Kiss said. The base years for quota calculation will also remain the same – adjusted with GDP figures – but authorities will probably make some corrections to emission forecasts based on the 2005 verified emission factors.”

In order to lend some stability to the currently volatile emissions-trading market, it is important that the national allocation processes are finalized well before the start of the next trading period, the EC stressed last week.

The countries that have submitted allocation plans to the commission for the second period of the EU ETS include Germany, the U.K. and Poland, which have the three biggest quotas for 2005-2007. The commission hopes to reach its first decisions in November.

The commission has three months to rule on national emission credit allocation plans once it receives them. The EC can stop the clock when requesting extra information from member states, making the 90-day deadline flexible.

Judit Zegnál – with Bloomberg reports

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