A reform to the European Union’s carbon trading system hangs in the balance as some member states seek to strengthen opt-outs from a common European system.

Member states’ representatives are to vote next week (14 July) on changes to the rules governing auctions of emissions permits. Four member states – Germany, Poland, Spain and the UK – are blocking the Commission’s proposals and if there is no clear outcome they might yet disrupt the start of the next phase of the European emissions trading systems (ETS), the EU’s flagship policy to cut industrial greenhouse gases.

Under the next phase, which comes into force from 2013, carbon-emitting companies will be obliged to buy many more ETS permits rather than receiving them from free. In the early stages of the ETS, which was launched in 2005, over-allocation of free permits helped some polluters reap windfall profits.

The European Commission has already had to scale back its dream of a pan-European auctioning system for all 27 member states, though it argues that a common auction platform would strengthen carbon prices, cut costs and minimise the risk of the ETS being exploited by money launderers and criminal gangs.

A blocking minority of the largest polluting countries is insisting on the right to opt out of the European auction organisation. Germany and the UK are keen to maintain their own national systems for selling their ETS allowances.

Despite obtaining an opt-out, the four may still vote against the Commission rules, if their national auctioning systems are not treated equally. National platforms should not be “treated worse or discriminated against” said one EU diplomat. “It is important for us that the opt-outs from the common platform are not treated as…a strange deviation.”

The blocking countries are also opposing an attempt by the Commission to limit their opt-out to five years.

A UK government spokesperson said: “We believe that several competing platforms will encourage a liquid and functioning market, improve standards and cut unnecessary costs.”

Industry warnings

Industry groups are warning that failure by the member states to agree the rules on time would disrupt the European carbon market, while energy analysts fear repeating past mistakes.

Sanjeev Kumar, a senior associate at E3G, an environmental consultancy, said that recent history had shown that the ETS needed to be centralised to be effective. “The more fragmented the markets are, the easier it is for certain companies to game the market…A lot of the auctioning is going to be in the wild west of the carbon market and that is worrying.”

The electricity industry, which will be obliged to buy virtually all its carbon credits from 2013, has warned that failure to agree the rules on time will disrupt markets and increase prices.

Nicola Rega of the Union of the Electricity Industry (Eurelectric) said that the industry’s biggest priority was to have the system up and running next year, because power companies often sign contracts to supply electricity two years in advance. “The priority is to have these allowances on the market. Otherwise we would need to go to financial markets and buy financial products to cover the risk and that will bring prices up.”

Folker Franz at BusinessEurope, the pan-European employers’ association, said ETS rules were being delayed in other areas. “There is a general feeling of planning uncertainty and delay. We need to get going.”

The problems stem partly from an over-hasty revision of the ETS, as part of the EU’s climate and energy package during France’s EU presidency in 2008. To secure a quick deal, decisions on many thorny issues were postponed to the EU’s special committee (“comitology”) process. “The hasty adoption of the directive due to the French presidency has always created pressure,” said Franz. “A lot of the actual decisions were outsourced to comitology. Now those decisions have to be made.”

A Commission spokeswoman said “We truly hope for a positive vote on the 14 July, which would allow us to proceed swiftly with large-scale auctions for phase 3 [2013-20]. If we postpone discussions until after the summer, we can’t have the timely start that everyone is looking for.”

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