Backloading arrives in the EU ETS

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Today marks something of a milestone in the troubled life of the European Union's Emission Trading Scheme. This morning, ICE Futures Europe will be the first trading platform to issue a permit sale following on from the announcement that 900 million allowances will be temporarily removed. In real terms, this means approximately 2.51 million allowances will be made available today, compared with an average of 4.63 million allowances that have been made available in all sales of 2014 so far.Now this is obviously just the number of allowances associated with the UK's national platform, however, the other national platforms (Germany and Poland also have their own) and the wider EU platform will be making similar moves during the coming months.It's early days, but the act of withholding these allowances appears to be having effect both the Commission and others had hoped for. The cost of allowances traded on the UK's platform has increased by 28% over the past month (up to 7€ per m/t as of 04/03/14), which is widely understood to be the market gearing up for implementation of backloading. Clearly this is still below the price at which the designers of the scheme envisaged, however, those calling for measures to ensure that the price reaches a point where Energy Intensives and others have to switch to low carbon alternatives are missing the point. The ETS was always designed to meet a pre-determined cap - at least cost and backloading have been introduced to fix the macro market, not at a micro level where specific industries are forced to move to low carbon.As EEF, we remain certain that pricing manufacturers and EIIs out of Europe will be counterproductive in the battle against climate change and should be avoided at all costs.

**Update**Proving the unpredictable nature of carbon markets, the first auction with a reduced number of allowances saw the price of permits fall by as much as 6.4% to approx €6.46 per M/T. The reasons for the drop? Well, it's not entirely clear, but a fall in industrial output in the Eurozone area during January will undoubtedly have had an impact.

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