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EU Energy Chief Warns Over Carbon Market Reforms

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02/18/2013 | 12:25pm CEST

BRUSSELS--A permanent reform to raise prices on the European Union's ailing carbon market would pose legal challenges, said European Commissioner for Energy Guenther Oettinger, raising a skeptical note about efforts to inject new life in the bloc's flagship program to fight climate change.

Mr. Oettinger's comments come just before an influential committee of the European Parliament will hold a crucial vote for the future of the Emissions Trading System, which has lost effectiveness because of low prices. The environment committee will vote on Tuesday on whether to support a proposal aimed at boosting CO2 prices in the short term. Earlier this year, a non-binding vote against the plan in another committee sent prices to their lowest level in years.

The ETS is Europe's main instrument to reduce greenhouse gas emissions and the EU has been promoting it worldwide as the most efficient way to do so, seeking to engage other nations to build similar plans. A demise of the system would be a big blow for Europe's climate ambitions, and the continent would have to redesign its policy from scratch.

The European Commission--the EU's executive body--has proposed temporary measures but is also trying to hammer out a reform to permanently eliminate the oversupply. But Mr. Oettinger said in an interview that the latter may run into legal obstacles.

Last year, the commission floated six different options to permanently reduce the oversupply, such as canceling CO2 permits, including other industries in the market to increase demand, or even a mechanism to directly manage the prices, which experts say could resemble the way central banks manage currencies. Changes like this would require the approval of other EU governments and the EU parliament, which would take some time.

"I am not sure what is feasible in a legal manner, because it is an existing scheme so many stakeholders are engaged, have invested and so to change on the way to 2020 is a really sensitive issue," Mr. Oettinger said.

The ETS was created in 2005 with the aim of putting a price on permits to emit CO2 by capping their numbers and encouraging their trade. Companies would have preferred to invest in clean technologies to permanently lower their greenhouse gas emissions, rather than pay for permits. The higher the price, the stronger the incentive. But the recent economic crisis cut industrial production, consequently reducing CO2 emissions and the need to buy permits. This, combined with an oversupply dating from the ETS early days, has depressed prices to under three euros, a level at which the cost of CO2 becomes irrelevant for investment decisions.

Mr. Oettinger said that the carbon market is "vital" and he supports the proposed short-term measures, even though he doesn't think they will drive prices up enough to encourage expensive investments in clean energy, such as the so-called carbon capture and storage--a technology that traps CO2 as it is produced in power plants or industrial installations and then stored underground.

"In 2010, 2011 we had a price level of normally 14 to 18 euros, maybe the price will come back to this level, but not to the level which will be needed for private investment in CCS," Mr. Oettinger said, adding that public funding to support such projects will then be needed.

Experts say that CO2 permits would have to cost almost 40 euros to make CCS economically viable.

Mr. Oettinger also said that the carbon market should have a role in the EU's long term climate policy. The bloc is now starting discussions on how to shape that policy after 2020, the year by which it has set binding CO2 emissions targets.

(Claudia Wiese contributed to this article.)

Write to Alessandro Torello at alessandro.torello@dowjones.com

Subscribe to WSJ: http://online.wsj.com?mod=djnwires

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