EU Directive Insecurities Concerning Phase III of the EU ETS

The lack of clear decisions of the European Commission (EC) and the European Parliament (EP) on the legal framework for phase III of the Emissions Trading Scheme have significant influence on prices of phase II.

It proved to be difficult to reach an agreement on two issues:

• Full auctioning from 2013 and onwards
  
• The number of CERs/ERUs allowed into phase III

Until end of October 2008, the EU Environment Ministers were unable to agree on a review of the EU ETS. The lack of a general agreement comes as no big surprise, given the difference in positions of EC, EP and the European Council regarding the use of CER/ERU within the EU ETS:

• ECīs proposal allows a total of only 1,400 Mt CER/ERU for 2008-2020 (without international agreement and an EU target of 20% below 1990 levels by 2020)
  
• EP prefers a slight increase of up to 1,570 Mt CER/ERU.
  
• Countries like the UK and Germany promote more flexibility regarding CER/ERU. UKīs proposal allows 1,825 Mt CER/ERU from 2008-2020, Germany suggests 2,258 Mt CER/ERU.
  
• In case of an international agreement and an EU target of 30% below 1990 levels, the general suggestion is significantly higher volumes of CER/ERU to be used from 2008-2020.

Another topic which provokes strong discussion and has strong influence even on the current market is full auctioning vs. free allocation. While the ECīs proposal suggests full auctioning for energy suppliers, Italy, Germany and a group of Eastern European countries, led by Poland oppose full auctioning and blocked a decision on the full auctioning of EUAs from the beginning of phase III on.

These discussions could eventually lead to a softening of the EU Directive on Phase III in comparison to the current draft which contains low allocation levels (from 1,974 Mt in 2013 to 1,720 Mt in 2020 vs. 2,083 Mt for Phase II) and a very restricted use of CER/ERU credits. A softening of the EU Directive for phase III would lower the pressure on EUAs and would improve security of investments in CDM and JI projects. Regardless of the outcome, for the continuation, development, security and trust of the EU ETS Market it is most important that a decision is reached soon.