A European Commission proposal to temporarily withhold a volume of carbon allowances to combat an oversupply in Europe's cap-and-trade system will be completed by the end of 2012, an EC official said Thursday.
"We are planning to come forward before the summer holiday with two products," said Jos Delbeke, director general of the EC's DG Climate Action.
The EC will come forward with a report on the EU Emissions Trading System which will include recommendations on whether action is needed to curb an oversupply of carbon allowances that has sent prices to record lows, he told delegates at the Carbon Expo conference in Cologne.
The proposal — which will focus on the possibility of delaying auctions of EU Allowances after 2012 — represents a short-term measure to avoid adding more supply to an already oversupplied market.
"So we have a proposal on backloading auctions. That will go through the EU Climate Change Committee and definitely before the end of the year this must be clear, and it will be clear," said Delbeke.
The second element is a longer-term structural reform proposal to address oversupply which may include details on what to do with surplus allowances.
That longer-term reform would require changes to the EU auction regulations which would need approval under the so-called co-decision process. In that process, the directly elected European Parliament would have to approve EU legislation together with the Council, which includes representatives of the 27 EU member states.
Longer-term reforms could "easily take one-to-three years," said Delbeke.
Debate among participants in the EU Emissions Trading System in recent months has focused on whether the current carbon price of Eur6.00/mt to Eur7.00/mt is too low to drive investment in low carbon power plants and factories, and whether the system's regulator, the EC, should intervene to drive prices higher.
An official at Norwegian oil and gas company Statoil said a stronger carbon price signal is needed.
"We think there needs to be an intervention to re-establish trust [in the carbon price]," said Statoil's senior vice president Hege Marie Norheim.
A large proportion of the emissions reductions needed to keep global temperature increases below 2 degrees Celsius will have to come from carbon capture and storage projects, which currently depend on public money, she said on a panel discussion at the conference.
To become commercially viable in the long-term, CCS projects will have to work without state subsidy, she said.
"The only way that can happen is through the carbon price," said Norheim.
"We haven't designed the carbon market to be able to cope with shocks to the system [such as severe recession]. We believe there should be a long-term reform with targets and an intervention to drive short-term prices," she said.
The EC's Delbeke said the Commission is reluctant to intervene in what is designed to be a free market.
"We have to put what is happening in context with other markets around the world. We are in a severe economic recession. The market should not be destabilized by too frequent interventions. That is why we have not acted yet. We are very reluctant to do that," he said.
