The European Union wants to delay the auctioning of nearly 1 billion carbon permits starting next year and set tighter climate goals in a bid to boost the price of CO2 on its Emissions Trading System, Climate Commissioner Connie Hedegaard said yesterday.

"Our carbon market is delivering emissions reductions, but because of oversupply, the ETS is not driving energy efficiency and green technologies strongly enough," Hedegaard said. "This is bad for Europe's innovation and competitiveness."

As a first step, the European Commission proposed delaying the auctioning of 900 million carbon allowances on the world's largest CO2 market in the next three years.

"We must not flood a market that is already oversupplied," Hedegaard said. "Market operators must have clarity before year-end on this. At the same time, the [European] Commission presents options for possible structural measures that can provide a sustainable solution to the surplus in the longer term."

The surplus of emission allowances has primarily built up because the economic crisis reduced industrial emissions of greenhouse gases by more than expected, leading in turn to lower demand for allowances from businesses, said the European Commission, which is the European Union's executive branch.

This situation has led to the price of carbon falling to record lows on the ETS this year. Carbon traded near €8 ($10) per metric ton yesterday, a price analysts say is too low to encourage investments in renewable energy. Without action, the surplus is expected to continue in the third phase of the system, which will run from 2013 to 2020.

Aiming for 30% reduction by 2030

In 2012 and 2013, a large increase in the supply of allowances is planned for the ETS, both those to be allocated for free and those to be auctioned. This is partly due to the inclusion of new sectors and gases, but the supply of allowances and international credits is also expected to temporarily increase due to specific factors linked to the transition from phase 2 to phase 3 of the cap-and-trade program.

The commission proposed to reduce the volume auctioned by 900 million permits from 2013 through 2015, putting that amount back into the market from 2019 to 2020. If no action were taken, more than 3.5 billion permits would be auctioned from 2013 through 2015.

"The commission's proposal to postpone auctioning of 900 million allowances most likely will not impact the market price significantly," said Esa Hyvarinen, vice president of corporate relations at Finnish utility Fortum. "However, we encourage the commission to finalize the backloading as soon as possible. Backloading should be followed by a permanent cancellation of allowances."

In addition, the commission proposed six other steps to shore up the ETS. The first option is to boost the E.U. target so the goal is to cut its CO2 emissions by 2020 by 30 percent from 1990 levels, compared with the current target of 20 percent. To get to that, the European Union would need to remove 1.4 billion CO2 permits from the ETS, the commission said. A second option is to retire an unspecified number of allowances on a permanent basis instead of removing some now and adding them back into the auction process later.

"The structural measures published today by the European Commission are urgently needed to stop the massive oversupply of emission allowances and to re-establish confidence in the ETS," said Stephane Bourgeois, head of regulatory affairs at the European Wind Energy Association lobby group. "Backloading is a necessary first step, but will only delay and not solve the structural problem of oversupply in the ETS."

'Make or break time' for Europe's trading system

Another option would be to include new sectors of the economy in the ETS. The commission didn't say which sectors, only that it would target "energy-related CO2 emissions in sectors currently outside the E.U. ETS." Fortum's Hyvarinen said that transport and the heating and cooling sectors would be good candidates for inclusion.

A fourth proposal would limit or ban access to international carbon credits on the ETS after 2020. Two more technical proposals would change the way the emission cap's tightening is calculated in the ETS every year and institute a "discretionary price mechanism" in which allowances would be deposited in cases of excessive drops in the price of carbon.

The wind lobby group's Bourgeois said going to the 30 percent CO2 reduction target by 2020 would be the best way to shore up the ETS, while changing the CO2 cap calculation and permanent retirement of permits are second and third best.

The E.U. Climate Change Committee is scheduled to first discuss the proposed backloading volume at its next meeting today in Brussels.

"Given the current supply overhang in the market and the depressed prices being paid for carbon, these reforms may well be make or break time for the ETS," said Marcus Ferdinand, senior market analyst at consultancy Thomson Reuters Point Carbon.