Backloading barely dented EU emission allowance surplus in 2014

Additional offset credits and low EU emissions mean surplus in emission permits remains largely untouched.

Despite measures undertaken to hold emission allowances back from the EU Emissions Trading Scheme (ETS) least year, to reduce the surplus in allowances and boost the carbon price, an increase in carbon offset credits purchased from overseas in 2014 meant that the overall allowance surplus was barely reduced. It still remains at around 2bn tonnes of carbon dioxide.

Analysis from carbon campaigning organisation Sandbag shows that 256mn tonnes worth of offsets, purchased by companies fearful of upcoming legislation that could eventually make them inadmissible, cancelled out most of the 400mn emissions allowances that were taken out of the scheme in an emergency ‘backloading’ measure in 2014.

As a result, even with the 400mn backloaded allowances, the 256mn offsets purchased, combined with a large drop in actual emissions from ETS participants, meant that the overall emissions surplus currently in the ETS has only dropped by 10mn allowances – and still sits at a total of 2,088mn tonnes of carbon dioxide. This is significantly higher than the initial impact assessment for backloading, which forecast a drop down to a surplus of 1,570mn tonnes after 2014.

‘The failure of the backloading decision to tackle the over-supply crippling Europe’s carbon market should serve as a stark warning against timid new fixes to the scheme,’ said Damien Morris, Head of Policy at Sandbag. ‘Latest emissions data supports the need for a much more ambitious programme of reforms.’

Sandbag criticised the rules around the ETS for failing to keep up with the observed drops in emissions from the scheme. The cap of the ETS drops by 38mn allowances each year, while in 2014 emissions fell by twice that amount. For a cap-and-trade scheme to be effective, the caps have to be felt by participants.

The ‘huge surplus’ in the market remains ‘stubbornly high’, says Sandbag.

Meanwhile, policymakers agreed to implement measures voted for by the European Parliament to implement a ‘market stability reserve’ (MSR) to more permanently hold back allowances (see the April issue of Energy World). Trialogue negotiations between the Parliament, and the European Commission and Council, ended with an agreement to reform the market and implement the MSR in 2019 – two years ahead of the Commission’s original proposal.

Backloaded emissions from 2014 will not re-enter the market in 2019, as was originally proposed, and will be transferred into the MSR. Sandbag estimates that the agreement could clear the 2.1bn in surplus allowances described above by 2020.

‘The start date of 2019 shows that Member States are prepared to compromise,’ said Ivan Pineda, Director of Public Affairs at the European Wind Energy Association. ‘But we have to acknowledge that Member States and the Parliament could have been far more ambitious in the shake-up of the carbon market and that much more comprehensive reform is needed in order for this instrument to provide a meaningful signal to investors.'