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The European Union should avoid “spoiling” its carbon market with measures to bolster emission prices by withholding permits or changing the bloc’s pollution caps, according to Poland’s Environment Minister Marcin Korolec. Poland, which is leading a group of countries opposing tighter climate targets, said last week it may block any political declaration at the March 9 meeting that would lead to more stringent policy in the coming years.

The 27-nation bloc’s environment ministers are scheduled to meet in Brussels on March 9 to discuss climate strategy. The EU should stick to its current target to reduce emissions by 20 percent in 2020 compared with 1990 levels and refrain from steps that would change the design of the carbon market, Korolec told his counterparts in a letter obtained by Bloomberg News.

“Any administrative and arbitrary changes of either the cap or the amount of allowances on the market would destroy its essential market features,” Korolec wrote. “We would not want to destroy the market we created with so much effort, or else we could simply replace it with a tax regime if we don’t like the market forces at play.”

Korolec’s comments highlight the divide among member states about the EU’s future emission-reduction goals and the functioning of its emissions trading system, the world’s biggest carbon market. Poland, which is leading a group of countries opposing tighter climate targets, said last week it may block any political declaration at the March 9 meeting that would lead to more stringent policy in the coming years.

48 Percent Price Slump

The letter sent to European ministers today comes after environmental groups and investors’ associations stepped up pressure on the EU to withhold some allowances from the market after the price of carbon permits slumped 48 percent in the past year on economic slowdown and oversupply.

The European Parliament’s industry committee last week endorsed the option of withholding the “necessary” amount of permits from auctions as of 2013 in an amendment to a planned energy efficiency law. The European Commission, the bloc’s regulatory arm, has repeatedly said it needs a political decision to come forward with a draft set-aside measure.

Such “radical” proposals challenge the political compromise among EU nations in 2008 when they approved a package of climate-protection legislation, Korolec said. The package included tougher caps in 2013-2020 on power plants and factories in the EU emissions trading system, or ETS, and differing national limits until 2020 on greenhouse gases from industries outside the program.

‘Grave Political Risks’

“It would not only bring about grave political risks, but also undermine investor confidence in the stability of the EU climate legislation,” he wrote.

EU allowances for December dropped as much as 4.8 percent to 8.42 euros ($11.05) a metric ton on the ICE Futures Europe exchange in London today. The contract slumped to a record of 6.38 euros on Jan. 4 amid concerns that excess permits will weigh on the market in the coming years.

Analysts at Bloomberg New Energy Finance predict that, in the current trading period from 2008 through 2012, the ETS will be oversupplied by permits covering around 1.1 billion tons of CO2. This surplus may be transferred into the next trading stage from 2013 to 2020.

EU Energy Commissioner Guenther Oettinger said today the bloc needs to “reactivate” the system, adding that the issue of a set-aside endorsed by the parliament will be on the EU agenda in the summer.

Temporary Set-Aside

The commission originally floated the idea of withholding CO2 permits in a 2010 policy paper on climate change. It has suggested a temporary set-aside could be created from the pool of allowances scheduled to be sold to companies by national governments starting in 2013. Any eventual cancellation of permits at the end of, or during, the 2013-2020 trading phase would require a revision of the ETS law in a separate process.

The EU regulator is not seeking the authority to intervene in the ETS, Peter Zapfel, emissions-trading coordinator at the commission, said at the Argus emissions conference in Amsterdam.

“Banked phase-two allowances add to the supply of allowances in phase three from auctions and free allocation and are expected to impact the price signal for a number of years,” he said. “The recession may therefore have a long-lasting effect and could give rise to false investment signals or lock in of carbon-intensive infrastructure.”

Bloomberg, 7 March 2012