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Commission proposals for carbon market reform are a "quick fix", says expert

Proposals by the European Commission to "rebalance supply and demand" in the EU emissions trading scheme (ETS) are a "quick fix, reactionary measure" that may not deliver the certainty that industry needs, an expert has said.

Environmental law expert Eluned Watson of Pinsent Masons, the law firm behind Out-Law.com, called for "further urgent action" to push through  "fundamental structural reform" of the scheme.

"Many of the structural measures proposed by the Commission will not be in place before the second half of Phase 3 of the EU ETS, and not until 2017 at the earliest," she said. "It is hoped that this will not be too late and that the EU ETS remains an effective mechanism to promote the reduction of greenhouse gas emissions and to drive investment in a wide range of low carbon technologies."

The Commission has proposed 'back-loading' auctions for carbon allowances under the third phase of the scheme, transferring some 900 million allowances that would otherwise have been made available for auction between 2013 and 2015 to later in the same period. By doing so, it hopes to address the build-up in allowances caused by reduced industrial activity during the economic downturn.

Among six proposed structural changes raised by the Commission in its first report (12-page / 225KB PDF) on the carbon market are increasing the EU's carbon reduction target from the current 20% to 30% by 2020, and the permanent cancellation of a number of allowances. It has also proposed extending the EU ETS to cover additional sectors.

"Our carbon market is delivering emissions reductions, but because of the oversupply in the market the ETS is not driving energy efficiency and green technologies strongly enough," said Carbon Action Commissioner Connie Hedegaard. "This is bad for Europe's innovation and competitiveness. This is why as a first immediate step we propose to delay the auctioning of 900 million allowances in the next three years. We must not flood a market that is already oversupplied."

She called on member states to approve the proposals quickly in order to give market operators "clarity" about future emissions trading before the end of the year.

Under emissions trading arrangementsthere is a cap on the amount of greenhouse gases that may be emitted by industry. Companies are allocated emissions permits or allowances representing the right to emit or discharge a specific volume of emissions in line with national allocation plans. Companies with excess allowances can trade with those who need to buy more allowances to comply with emissions limits..

The EU ETS began in 2005 and was the first large emissions trading scheme in the world. Its third and final phase begins on 1 January 2013 and runs until 2020. The EU ETS covers more than 11,000 factories, power stations and other installations with a net heat excess of 20MW per year. It currently operates in all 27 EU member states as well as Iceland, Norway and Liechtenstein and is set to fully link up with a future Australian emissions trading scheme by 2018.

This year the scheme was extended to cover the aviation sector. However, this week the Commission announced that it would suspend the requirement http://europa.eu/rapid/press-release_MEMO-12-854_en.htm?locale=en for international flights for a year as a "gesture of good faith" due to international industry opposition. Internal EU flights will still have to account for their emissions under the ETS.

"Overall, industry will be pleased that the Commission has recognised the importance of reforming the EU ETS," Watson said. "Many energy companies, including those operating within the oil, wind and solar sectors support a stronger carbon price to drive innovation and to move away from carbon-intensive coal. However, the players within heavy industry are unlikely to support measures that will drive up the price of carbon allowances, and that there is a need to address the allocation of allowances to energy intensive installations that could be at risk of carbon leakage."

"The proposed increase in carbon reduction targets comes at a time when governments are coming under increasing pressure to prioritise cuts in emissions. For example, in Holland, European human rights legislation is being used to take the Dutch government to court over climate change failures."

The Guardian newspaper reported this week that a Dutch pressure group was threatening to take the country's government to court if it did not announce new initiatives on cutting emissions.

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