* ETS over-supply seen at 1.9 bln tonnes by 2020
* At least 1.7 bln T should be set aside to correct over-supply
* Set-aside CO2 permits should be permanently cancelled
By Nina Chestney
LONDON, July 6 (Reuters) - The European Union should set aside at least 1.7 billion carbon permits from its emissions trading scheme (ETS) to prevent carbon prices from falling too low and threatening green investment, said a report by environmental group Sandbag.
The EU is aiming to improve energy efficiency by 20 percent below 1990 levels by 2020, and is pushing to increase this target to 25 percent.
A tougher target could lead to the over-supply of carbon permits as energy efficiency measures curb the activity of power producers. That would lead to weak carbon prices and threaten green investment.
EU carbon prices have lost around 20 percent over the past month, mainly due to concerns about a future glut of permits.
The EU ETS is already over-supplied due to the over-allocation of permits to industry. Sandbag expects over-supply to grow to 1.9 billion tonnes by 2020.
To address this, the EU Commission is considering setting aside an undisclosed number of EU carbon permits in the ETS’ third trading period (2013-2020) to prevent further price drops.
“Our climate seatbelt is so loose it’s almost useless and Europe urgently needs to buckle up and remove at least 1.7 billion permits if it is to get its flagship policy back on track” said Damien Morris, senior policy adviser at Sandbag and principal author of the report.
A set-aside of 672 million tonnes would be enough to correct industry’s over-supply which is carried forward from the ETS’ second, current trading period (2008-2012).
“But this is not sufficient to correct the indirect effects this over-supply had in driving up the baseline from which the Phase 3 budget (emissions caps) was drawn,” the report said.
Therefore, Sandbag recommends a further 1 billion tonnes should be set aside to account for this.
“This 1.7 gigatonne set-aside should be introduced before Phase 3 gets under way in 2013,” the report said.
In addition, the set-aside permits should be permanently cancelled to avoid the risk of them “returning to haunt the system” in 2020 or in future trading periods, Sandbag said.
“As much as 4.6 billion tonnes of emissions could be saved against business as usual 2008-2020 emissions if this set aside were permanently cancelled,” the report added.
The EU Commission should also consider introducing a steeper course for its emissions caps from 2015 onwards, create an ongoing cancellation mechanism to account for oversupply, introduce a reserve price for auctioned permits and expand the ETS cap to cover the whole economy, Sandbag said. (Editing by James Jukwey)