EU Carbon Permits Jump After Ministers Agree on Market Overhaul

(Bloomberg) -- European Union emission allowances climbed to the highest in almost two months and trading surged after environment ministers agreed on a carbon-market overhaul aimed at reducing a glut and boosting prices from 2019.

The proposal includes doubling the rate at which a mooted reserve would absorb surplus emission allowances from the market, according to the accord struck late Tuesday in Brussels. The deal includes an option to cancel the equivalent of two years' worth of allowances by 2030, based on calculations by Sandbag, an environmental group in London.

EU lawmakers are attempting to reform the bloc's $48 billion cap-and-trade system, where a glut of carbon permits has pushed prices down more than 80 percent since 2008 and eroded the penalty for polluting. The pact agreed on Tuesday paves the way for negotiations with the European Parliament and the European Commission on the final legislation.

The proposals approved by ministers appear to be better than expected, said Tom Lord, who buys carbon permits for clients at Redshaw Advisors Ltd. in London. “Instead of watering them down, it looks like they strengthened them, which boosts the ambition.”

Permits for December rose as much as 13 percent to 5.92 euros ($6.25) a metric ton on the ICE Futures Europe exchange in London, the highest since Jan. 3, and traded at 5.87 euros at 4:30 p.m. The volume of benchmark contracts traded Wednesday almost tripled to 30 million tons, the most since June.

Ministers agreed on the deal even as Poland, which on Wednesday called it a “scandal,” and eight other nations sought to block it.

The steel industry association WV Stahl in Dusseldorf said higher carbon prices could threaten producers' cost effectiveness in Europe.

Cancel Option

The so-called carbon market stability reserve would remove permits from the market at a rate of 24 percent of the glut per year, double the original plan. The deal includes an option to cancel allowances in the reserve from 2024, so that only the equivalent of the previous year's auctioned volume remains in the pot.

“A complementary strengthening measure will be taken by canceling allowances in the market stability reserve,” EU Climate and Energy Commissioner Miguel Arias Canete said Tuesday. “This will reinforce the investment signals of the carbon market.”

The cancellation option means about 3 billion tons of permits from the planned reserve can be permanently retired through 2030, mostly in 2024, according to Sandbag. That's equivalent to about 20 months of emissions from factories and power stations covered by the EU's trading system, which gives away or auctions allowances to more than 12,000 polluters.

“Member states have now recognized the importance of limiting the volume of surplus in the market stability reserve,” Rachel Soloman Williams, managing director at Sandbag, said in a note on its website. “This means that prospects for the long-term future of the emissions trading system look much stronger.”

The agreement among EU environment ministers would keep the annual pace of carbon cuts in the market at 2.2 percent a year from 2021.

--With assistance from Marine Strauss Jonathan Stearns and Ewa Krukowska

To contact the reporter on this story: Mathew Carr in London at m.carr@bloomberg.net.

To contact the editors responsible for this story: Lars Paulsson at lpaulsson@bloomberg.net, Andrew Reierson