After several months of negotiations and uncertainty, the Commission Regulation 176/2014 (Regulation) implementing the backloading proposals was finally published in the Official Journal on 25 February 2014. This has already had a significant impact on the carbon price, which rose by 10% after the details were confirmed, hitting a 14 month high of €7.33 on 24 February 2014.

Whether or not EU Emissions Trading Scheme (EU ETS) installations were in favour of backloading, the publication of the Regulation does at least give some certainty over the short term future of the EU ETS.

Background

As reported in our previous articles the legislative reform gives power to the European Commission (the Commission) to withhold 900 million carbon allowances from 2013-15 auctions and reintroduce them later in Phase III, a process commonly referred to as "backloading". This has now been achieved by the Regulation, the full name for which is "Commission Regulation 176/2014 amending Regulation 1031/2010 in particular to determine the volumes of greenhouse gas emission allowances to be auctioned in 2013-20".

When will allowances actually be withdrawn?

The UK has announced that it will be the first Member State to withdraw allowances from the EU ETS.  According to ICE Futures Europe, from 12 March 2014 the UK will reduce the volume of its fortnightly auction of allowances from 4.63 million to 2.515 million. Other Member States will start to cut the number of allowances per sale from 17 March 2014, with Poland stopping auctions altogether from 5 March.

How will backloading affect the price of carbon allowances?

Backloading is intended to increase the price of carbon allowances and encourage installations to instead invest in energy efficiency measures to reduce the cost of compliance. Although it has so far had a positive effect on the carbon prices, traders expect prices to fluctuate over the next week or so before the first portion of allowances are removed.

However, without further substantive legislative reform the future of a successful EU ETS still remains uncertain. A decision is still to be made on whether the more dramatic changes to the EU ETS like the proposed reserve mechanism will be introduced. The reserve mechanism would make it possible for supply to be adapted to meet demand and address the surplus of allowances. Given the difficulties of achieving approval for backloading it is likely that a final decision on the wider structural reforms will not delayed for some time.