Carbon plumbs new depths as EU rejects market recovery plan

European carbon permits have plunged by a record amount to an unprecedented low after lawmakers rejected an emergency plan proposed to address a surplus of allowances blamed for the bloc’s faltering emissions trading scheme.

The price of EUAs collapsed by as much as 45 per cent to an all-time low of €2.63 a metric tonne after the backloading proposal – a plan tabled by the European Commission last year to delay the issuing of 900mt allowances in phase 3 of the EU’s ETS – was rejected by 334 votes to 315 (63 abstaining).

“The EUA market is essentially finished until further notice,” said Jeffries Bache analyst Matthew Gray, who puts the proposal’s failure down to “EU deindustrialisation,” with the bloc’s political economy skewed in favour of the manufacturing sector as the focus on competitiveness sharpens.

Bloomberg reports that opponents of the plan, including the Polish government and the European People’s Party, the biggest political group in the Parliament, have argued it would raise energy costs and artificially boost prices.

Others, however, are blaming the failure of the market recovery plan on a UK Tory rebellion, with the roll call for the vote confirming only four Conservative MEPs voted with the government, while 22 voted to reject the proposals.

“David Cameron’s MEPs must bear their share of the responsibility,” said Greenpeace’s Joss Garman. “They voted with some of Europe’s more unsavoury political parties to kill a proposal that would have resulted in a reduction in pollution. The central plank of Europe’s strategy for cutting carbon emissions is now rendered impotent as it won’t stop a single dirty coal plant from being built.”.”

What now? As BusinessGreen reports, the vote did not permanently reject the backloading proposals, instead sending them back to the committee for further consideration. “There is still a theoretical chance that the measure may pass, but that is not looking at all likely,” said Konrad Hanschmidt, an analyst at Bloomberg New Energy Finance in London. “We now expect waves of speculative selling, followed by industrials also liquidating their surpluses.”

According to Matthew Gray, the EU ETS will now operate more like a tax than a market, while Europe faces the risk of becoming the global dumping ground for cheap coal.

“Excluding basic repurchase agreements, speculators and industrials will exit the market, which only leaves utilities who will continue to cover power hedges,” says Gray.

“Utility market interaction will be analogous with penguins at a zoo; they will know what time they’re going to get fed and how much they’re going to get. Those struggling Mediterranean manufacturers will no longer be able to sell free EUAs to take the edge-off their overheads when the value of carbon is so low. As a consequence, volatility will naturally decline which is the only reason why speculators have kept entering the EUA market with conviction.”