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Market News

 February 28, 2012
EU vote expected to back plan to prop up carbon price

 EU parliamentarians are today expected to back action to stimulate carbon prices in the bloc's emissions trading scheme (ETS) as part of a wider vote on energy efficiency.

With prices of EU Allowances (EUAs) hitting record lows over the past few months, politicians are considering proposals to set aside a number of emissions permits due to be sold from 2013 in a bid to reduce an estimated surplus of a billion allowances in the carbon market.

The impact of the world-wide recession left carbon intensive firms with far more permits than they needed, leading to an over-supply in the carbon market that resulted in EUA prices falling to less than €7 a tonne, far below the level needed to encourage investment in low carbon technologies.

Fears were raised that the Energy Efficiency directive, which aims to reduce energy use 20 per cent by 2020, would only exacerbate this effect by curbing emissions further.

A previous proposal to hold back a specified 1.4 billion permits was passed by only one vote in December, but earlier this month a compromise emerged calling on the Commission to consider measures that could include withholding "the necessary amount" of allowances.

This draft document has "a very broad consensus with all the political groups", Claude Turmes, vice president of the Green Party and the driving force behind the energy efficiency draft directive, told reporters.

Businesses including Shell, Alstom, SSE and Dong Energy have signalled their support for the proposal and wrote a letter to European Commission president Jose Manuel Barroso in December urging him to reduce oversupply in the market.

However, businesses will be looking for reassurances the held-back permits are not simply released later on.

Significantly, Poland remains opposed to the proposals, warning that its strong coal base means that higher carbon prices could have a negative impact on its economy.

This could mean the Directive is in for a bumpy few months of ministerial negotiations, given it has been identified by Denmark as a key priority for its EU presidency, which comes to an end on June 30.

As well as the overall efficiency targets, the Directive would require energy companies to make annual energy savings equal to 1.5 per cent of their sales and set a target for public bodies to renovate three per cent of the floor area of public buildings each year.

A quiet morning of trading saw EUAs reach €9.33, 1.89 per cent up, but analysts said a price breakout is "likely" today depending on the result of the vote.

A note issued by Matthew Gray, an analyst at Jeffries, this morning noted less than expected volatility over the past week.

Gray said: "This could suggest that since the draft agreement news on the 16th of February the market has become increasingly relaxed and confident that today will go well."