UK delays on phase 2 EUETS allowances

The Environment Department (DEFRA) has delayed issuing allowances for phase 2 of the EU emissions trading scheme (EUETS) until there is a functioning link with the UN international transaction log.

Only Austria and Denmark met the February deadline to issue allowances for phase two of the EUETS, which began in January.

DEFRA said it had held back on issuing allowances because the European Community Independent Transaction Log, which manages all holdings of EUETS allowances, is not yet connected to the UN’s international transaction log, which performs the same function for emissions trading under the Kyoto Protocol. The lack of a link has only just become a problem because the first commitment period of the Protocol, which runs to 2012, began this year.

The link between the registries has been established for some time, but DEFRA complains that it has not been properly tested. The European Commission hopes to have it up and running by April next year, but DEFRA hopes it will be live by the summer.

DEFRA says its failure to issue allowances on time will have little impact on the market because most trades are forward contracts, and spot trades can continue using the allowances issued by other member states.

But the failure of other large emitters like Germany and Poland to meet the deadline means less than 3% of allowances have been issued, which is likely to affect the liquidity of the spot market.

Extended delays will have an impact as many contracts require regular surrender of allowances. In particular any hold-up beyond December, when most trades require a physical exchange of 2008 allowances, will hit the market.

If the connection is not live by then, member states may have to fall back on a temporary fix put in place by the European Commission which would allow linking to the UN system.

In February, Prime Minister Gordon Brown floated the idea of a European central bank to allocate EU allowances. "Building on the [European Commission’s] work to strengthen the EU emission trading scheme, to promote the longer-term transparency and predictability that the market needs, we favour the creation of an independent European carbon market bank to set caps on carbon permits and establish how the carbon market should operate in the future," he told journalists in Brussels following a meeting with Commission President Jose Manuel Barroso.

The idea of an independent body to regulate the market was first proposed by former Environment Secretary David Miliband last year as a means of minimising political interference in setting emission caps. The Commission has been embroiled in an acrimonious and lengthy series of legal battles with some member states over the emissions limits they have set companies in their national allocation plans (ENDS Report 389, p 48 ).

But it is surprising that Mr Brown is still backing the concept as the reforms to the scheme proposed by the Commission in January would have a similar effect (ENDS Report 397, pp 47-48 ). The proposals would do away with national allocation plans and give the Commission responsibility for setting a Europe-wide cap based on EU climate targets. They would also phase out free allocations and move towards full allowance auctioning by 2020. Taken together, these amendments should take the political heat out of the cap-setting process.

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