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EU Carbon Drops Most in Two Months As Ruling Sparks Uncertainty

Stephanie Bodoni and Ewa Krukowska, Bloomberg

Permits to emit greenhouse gases under the European Union cap-and-trade program had the biggest drop in two months after the region’s top court told regulators to correct mistakes in the way they calculate the allocation of free allowances to companies.

Exxon Mobil Corp., Dow Chemical Co. and OMV AG lost a challenge to a EU decision to cut the number of free emission permits they receive under Europe’s emissions trading system, the EU Court of Justice in Luxembourg said on Thursday. In the same ruling, it gave the commission 10 months to rectify errors in the existing regulation. The final number of permits that companies get for free could be higher or lower, the court said.

Benchmark allowances for delivery in December lost as much as 6 percent, the biggest intra-day drop since Feb. 23. The contract was 5.7 percent down at 6.45 euros per metric ton on the ICE Futures Europe exchange as of 12:27 p.m. in London.

While the delay in implementation of the court’s decision was designed to calm the markets, the ruling creates uncertainty about the way the European Commission will calculate free allocation in 2017, said Trevor Sikorski, an analyst at Energy Aspects Ltd. in London.

‘Complex’ Solutions

“What we need is to have insight into all the details as soon as possible,” said Marco Mensink, director general of European chemical industry lobby Cefic. “Solutions will be complex and are still unclear.”

The EU emissions-trading system covers about 12,000 installations owned by manufacturers and utilities and is Europe’s key tool to reduce greenhouse gases, which scientists blame for global warming. The bloc, which has given away the majority of emissions permits since it started its carbon cap-and-trade plan in 2005, will sell the majority of them in the eight-year trading period that started in 2013.

“The commission will work diligently to implement the court’s ruling, so as to reduce the uncertainty created by the ruling as to the free allocation for industry until 2020,” a EU spokeswoman said.

Companies including units of Eni SpA, Royal Dutch Shell Plc and Tenaris SA challenged the European Commission’s 2013 decision to apply a so-called correction factor for allocating free carbon permits.

Free Permits

The amount of free permits that companies receive depends on their carbon efficiency. To ensure that the total number of free allowances requested by member states doesn’t exceed the maximum amount allowed under EU law, the commission is entitled to apply a correction factor across industries, cutting the handout.

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