EU Panel Seeks 18% Rise in Imported Emission Credits

By Jonathan Stearns

Oct. 7 (Bloomberg) -- The European Parliament's environment committee voted to let energy and manufacturing companies import 18 percent more emission credits through 2020 to cut the cost of stricter domestic caps on pollution blamed for climate change.

The panel inserted the provision in a draft European Union law that would tighten carbon-dioxide curbs on electricity, steel, paper and other industries now in the EU emissions- trading system by 11 percent on average in 2013-2020 compared with 2008-2012. The system, the world's biggest greenhouse-gas market, requires companies that exceed their quotas on CO2 discharges in the EU to buy allowances from businesses that trimmed emissions.

The committee said today that United Nations-backed credits created through energy-efficient projects in developing countries such as China should cover an estimated 1.65 billion metric tons of EU emissions in 2008-2020 rather than 1.4 billion tons proposed by European regulators in January. UN permits are cheaper than EU allowances and can be used as an alternative for compliance under the emissions-trading program.

``It's a very balanced outcome,'' Avril Doyle, an Irish member steering the law through the 27-nation Parliament, said after the verdict in Brussels in a committee room overflowing with lobbyists. Further increasing the importance of access to UN credits, which are generated under the Kyoto Protocol's clean development mechanism, the committee endorsed adding the aluminum and chemicals industries to the cap-and-trade system and requiring the auctioning of EU allowances now allocated largely for free under the quotas.

Call for Flexibility

Industry and traders are pressing the EU to be more flexible with foreign credits beginning in 2013 as the European economy slows and concerns mount about energy-cost increases from targeting fossil fuels that are a root cause of manmade global warming. The companies affected range from utility RWE AG and oil refiner Royal Dutch Shell Plc to steelmaker ArcelorMittal and paper producer Stora Enso Oyj.

Stricter domestic emission caps underpin an EU goal to reduce greenhouse gases including CO2, the main such pollutant, by a fifth in 2020 from 1990. At stake is Europe's quest to persuade the U.S. and China, the biggest emitters, to sign up to a new global accord that would curb these gases after the Kyoto Protocol expires in 2012.

Lower Limit

The European Commission, the EU's regulatory arm, proposed the tougher emission rules on Jan. 23. The draft law covering the period 2013-2020 still needs the backing of the full 785- seat EU Parliament and national governments, which aim for an agreement by year-end under a fast-track procedure that increases the importance of today's committee vote.

The legislation proposed by the commission and approved by the environment panel would reduce the overall cap for the 11,400 installations now in the EU emissions-trading system to an average 1.846 billion tons of CO2 a year in the eight years through 2020 from 2.083 billion tons annually in 2008-2012.

In that context, the commission proposed limiting the use of imported credits in 2013-2020 to unexhausted quotas fixed for 2008-2012 as long as no global accord is reached to succeed the Kyoto Protocol, saying looser rules could open the ``floodgates'' for extra supply. This provision would translate into UN credits covering a total of 1.4 billion tons of emissions in 2008-2020, according to the commission.

`Small Step'

The environment panel raised this ceiling by an estimated 245 million tons by letting companies use imported credits to cover up to 4 percent of their discharges as an alternative to carrying over unused 2008-2012 import quotas. The new option would be conditional on companies having used such credits in 2008-2012 for less than 6.5 percent of their emissions.

``It's a small step,'' said Guy Turner, director of New Energy Finance, a London research company. The increase ``will act to reduce EU allowance prices, but not by very much.''

EU emission allowances for December rose 7 cents, or 0.3 percent, to 22.15 euros ($30.19) a ton on London's European Climate Exchange as of 1:14 p.m. local time. UN certified emission reduction credits for December gained 29 cents, or 1.6 percent, to 18.70 euros a ton.

The committee supported the commission's proposal to add the aluminum and chemicals industries to the emissions-trading system in 2013. A separate EU law approved earlier this year will also extend the rules to airlines as of 2012. As a result of these additions, the overall average annual EU cap for 2013- 2020 isn't yet known.

Lower Auctioning Rate

The committee also endorsed allocating fewer emission allowances for free under the quotas to prevent windfall profits and raise pollution costs, saying power producers should purchase their whole allotment as of 2013 and full auctioning should apply to the other industries from 2020 after a phase-in.

In a concession to those other industries, the committee said the auctioning rate for them should start at 15 percent in 2013 rather than the 20 percent proposed by the commission. The level would rise annually until reaching 100 percent in 2020.

The draft law allows for a possible exemption from auctioning for any energy-intensive industries judged to be exposed to global competition and liable to relocate to non-EU countries without emission curbs. The commission would have to determine these industries in 2010.

In a separate concession to companies including utilities, the panel voted to set aside for plants that capture CO2 and store it underground as many as 500 million allowances from a reserve for new market entrants in 2013-2020. This would be in addition to counting stored CO2 as not emitted under the emissions-trading system.

``This provides a realistic basis for funding,'' Doyle said.

The EU aims for about 12 carbon capture and storage demonstration projects by 2015 and is seeking ways to kick-start them with government aid. Companies including Vattenfall AB and Shell have urged the EU to grant allowances from the reserve to help finance the technology.

To contact the reporter on this story: Jonathan Stearns in Brussels at jstearns2@bloomberg.net