Further negotiations will be needed in September after EU carbon market legislative reform talks on Monday led to little progress, an EU source said late Monday.
EU lawmakers and member state representatives are likely to meet again on September 13 and potentially again in October, in a bid to thrash out a compromise agreement to overhaul the 31-nation EU Emissions Trading System, a well-placed EU source said in an interview late Monday.
"There's been little tangible progress yet. The negotiators realize that all issues are interlinked. They mapped everything out and repeated their positions," the source said.
At stake are the rules for Europe's 12-year-old carbon market for the period after 2020, with EU officials trying to strike a balance between curbing a long-running oversupply of CO2 allowances and ensuring that trade-exposed industries will continue to qualify for free allowances.
The talks are proving difficult not least because of the complexity of the proposed reforms, and in particular the risk that changing one element of the rules would have knock-on impacts on other parts of the legislation, the source said.
With that in mind, negotiators want to be more sure of the market impact of changing any of their positions, and they want hard data to demonstrate any potential impacts, the source said.
Those concerns are linked to elements such as canceling allowances from a reserve to hold surplus permits, various levels of free allocation for industry, and changing the percentage increase in free allocation in case there is a future cutback to supply across all industries.
"They want to know what the impact will be from changing any of the positions," the source said.
"The European Commission has requested technical work on a tool that would provide those insights," the source said.
"The co-legislators [EU Parliament and Council] are asking for that analysis. The Commission has been asked to provide this," the source said.
The next trialogue [three-way talks] will be on September 13. This is a tentative date -- this has to be confirmed," the source said.
CO2 PRICES TO SHIFT POWER GENERATION ECONOMICS
The post-2020 EU ETS reforms are significant for Europe's energy markets, because higher carbon prices are expected to change the economics of power generation, shifting the merit order of fuels for electricity generation from coal to cleaner gas, with clear implications for operational decisions for power plant operators as well as capital investment decisions over the long term.
"They [the negotiators] know the importance of this file and they want to know if they change a position on this, that it won't have some unforeseen effect," the source said.
"They want to be prudent and they want to have their position supported by data analysis," the source said.
When asked whether the September negotiating position would likely lead to an informal agreement on the reforms, the source replied "probably not."
"They simply want to get it right and not rush if there's no need for that," the source said.
"They probably need to have another trialogue [potentially in October]. They want to have something on the table by COP23 [UN climate talks on November 6-17] but that would be ideal," the source said.
"It's not as simple as going through each item and ticking it off. Changes to each element affect other elements, so there is great caution about finding a compromise," the source said.
The EU Parliament and Council must agree on a common text before the proposed legislation can pass into law.
That is now likely to take place some time in Q4, followed by formal approval likely in December or early 2018.
EU Allowance futures contracts for December 2017 delivery on the ICE Futures Europe exchange rallied sharply in the two days leading up to Monday's talks, hitting a four-month high of Eur5.56/mt on Monday, before easing back to Eur5.34/mt at 09.24 GMT Tuesday, down 6 euro cent from Monday's close. - Platts -