EU updates plans for next phase of emissions trading scheme

The European Commission has released fresh details on how it plans to operate the next phase of the EU's emissions trading scheme (ETS) starting in 2013, although market watchers warned further information was needed if the EU is to avoid fuelling volatility in the carbon market.

The Commission confirmed on Friday that it plans to cap greenhouse gas emissions from firms covered by the ETS at 1,926,876,368 tonnes of carbon dioxide in 2013, equating to just under 1.927 billion EU allowance (EUA) carbon credits.

It also confirmed that the cap for each year through to 2012 will be reduced annually by 1.74 per cent of the average annual number of allowances allocated between 2008 and 2012, taking the cap for 2020 down to about 1.7bn tonnes.

However, the Commission said in a statement that the proposed caps were not definitive and were likely to change as it completes plans to include new sectors, such as aviation and aluminium production, and new gases, such as nitrous oxide, in the annual emission caps.

It added that it expected to publish its final decision on the proposed cap later this year, although it admitted that "further marginal adjustments to the cap are likely to be needed over time" while the cap could change significantly if the EU agrees to raise its target for cutting greenhouse gas emissions by 2020 from 20 per cent to 30 per cent below 1990 levels.

The tightening of the cap through to 2020 is expected to drive up the cost of carbon through the ETS, with some analysts predicting it could reach between €40 (£33.50) and €50 by 2020.

However, the latest announcement had little impact on the carbon market where the price of EUAs continues to hover between €14 and €15.

"The cap held no surprises for anyone," said Alessandro Vitelli, director of strategy and intelligence at analyst IDEAcarbon. "They have trimmed it by 50 million tonnes compared to what was flagged last year, but it is largely in line with expectations."

He added that the cap would now be "tweaked endlessly" up to 2013 as the Commission provides updates on how it plans to integrate new sectors and new gases into the ETS. However, he predicted there were unlikely to be any major changes to the overall cap, with the changes amounting to "a few million tonnes here and there".

But while the cap for 2013 is largely in line with expectations, concerns are mounting over how the EU plans to manage the next phase of the ETS and in particular how and when it plans to auction EUAs.

Vitelli explained that the timing of auctions could create volatility in the carbon price by periodically flooding the market with EUAs.

He added that the European Commission could also prompt a spike in the price of carbon if it waits too long to begin auctioning the first round of EUAs for 2013.