* Adoption is final stage in legislative process
* Five EU Member States voice dissent
The EU Council on Friday formally adopted the European Commission's proposal to create a reserve to hold surplus CO2 permits under the EU Emissions Trading System, in the final stage of the legislative process.
The formal adoption, which was widely expected, means the proposed Market Stability Reserve will become operational in January 2019 and will remove 12% of the net surplus each year, so long as it remains above 833 million mt.
The EU Environment Council adopted the legislation on behalf of the wider EU Council.
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The MSR seeks to re-balance the supply of carbon allowances under the EU's flagship carbon market after the 2008-09 global economic crisis hit demand, allowing a surplus of more than 2.1 billion mt of CO2 equivalent to build up in the system and weakening the price signal for low carbon investment.
The final adoption of the proposal means the MSR will become law when the file is published in the EU's Official Journal, which would normally be expected to take several weeks but which could take as little as one week in this instance, according to EU sources.
The EC first proposed the MSR in January 2014.
"In 2013, there was a significant surplus of allowances in the EU ETS, which was expected to grow over the following years," the EU Council said in a statement Friday.
"This resulted from an imbalance between the supply and demand of allowances, since demand is flexible and affected, for instance, by economic cycles."
"The presence of a large surplus lowers the prices of allowances and reduces the incentives for low-carbon investment. Therefore, if not addressed, the current market imbalance would affect the ability of the EU ETS to meet its targets in a cost effective manner in the future," the Council said.
UK secretary of state for energy and climate change Amber Rudd said: "I welcome today's agreement, which the UK has been driving forward and will enable businesses to remain competitive and grow as we move to a low carbon future".
"With just over two months to go until the climate change conference in Paris, we are working hard to land a robust global deal that will mark the beginning of a global step change in efforts to limit global warming to two degrees in the long term," she said.
EU ETS SEEN BALANCING IN MID-2020s
In the final version of the text, the MSR will be established in 2018 and will become operational from January 1, 2019, the EU Council said.
A tranche of 900 million EU Allowances that were delayed, or backloaded, from auctions in 2014-16 -- as a stop-gap measure to avoid a price collapse -- will be placed in the reserve instead of returning to market in 2019 and 2020.
In addition, EUAs left unallocated from the 2013-20 phase will also be placed in the reserve in 2020, the EU Council said.
There will also be an MSR review which will take into account the reserve's impact on growth, jobs, industrial competitiveness and the risk of carbon leakage, it said.
Under the agreed rules, if the net surplus of allowances falls below 400 million mt, 100 million mt would be released from the reserve and added to the volume to be auctioned.
The MSR will tighten supply starting January 2019 and was widely expected to return Europe's carbon market into a balanced state in the mid-2020s.
The current estimated surplus of at least 2.1 billion mt could increase in the period to 2019.
However, assuming the surplus was maintained at that level by 2018, the MSR would remove around 250 million mt of allowances from the auction schedule in 2019, and would continue removing supply each year while the surplus was greater than 833 million mt.
The price of EUAs has increased over the past two years from as low as Eur2.46/mt ($2.82/mt) in April 2013 to as high as Eur8.43/mt last month as traders began to factor in a future tightening of supply as the legislation gained the successive backing of the EU Parliament's committees, full plenary and the EU Council, representing the 28 EU Member States.
FIVE COUNTRIES VOICE DISSENT
While the MSR proposal was passed overall on Friday, some EU member states continued to voice dissent. Bulgaria, Croatia, Hungary, Poland and Romania said they could not support the final compromise text.
The five countries "support all necessary and appropriate measures aiming at addressing the number of allowances and international credits on the ETS market", they said.
"However, these member states are of the opinion that such measures should ensure long-term predictability for market participants and should also fully respect all European Council conclusions in relation to the EU climate and energy policy," they said in a statement quoted in an EU Council document dated September 9.
"Poland, Bulgaria, Romania, Croatia and Hungary are strongly opposed to make the market stability reserve operational prior to 2021 [as first proposed]," they said.
"In our view, the early operation of the reserve (from 2019) together with the placing of the back-loaded and unallocated allowances directly into the reserve will not only change the current legal framework of the 2010-2020 Climate and Energy Framework, but it will seriously undermine the predictability of the carbon market for industry as well," the countries said.
The carbon price was little moved Friday on the adoption of the MSR, since informal agreement had already been reached in the EU co-legislature in May.
EUA futures contracts for delivery in December 2015 on the ICE Futures Europe exchange in London were quoted at Eur8.22/mt at 1152 GMT, down 2 euro cent from the previous close.
--Frank Watson, firstname.lastname@example.org
--Edited by Dan Lalor, email@example.com
[Updates earlier story with further details, EU Council comments]