EU split on carbon market reform ahead of U.N. climate talks

BRUSSELS (Reuters) - Splits among European Union policymakers over carbon market reforms could foil attempts next week to reach a deal ahead of United Nations climate talks in November, EU sources said. Negotiators for EU nations and the European Parliament meet on Oct. 12 after months of talks to try to finalize a legal text on reforms to the EU Emissions Trading System (ETS) post-2020. The cap-and-trade system to regulate pollution and help the 28-nation bloc meet its climate goals has suffered from an oversupply of permits, adding political urgency to the reforms. EU nations on Friday agreed a draft compromise proposal by the bloc's Estonian presidency, which is pushing hard for progress during its six-month chairmanship. U.N. climate talks in Bonn next month "are a big motivator" for concluding negotiations, one EU source said. "Everyone wants to go there with this in their pocket." The text shows negotiators are still striving to bridge divisions over how to balance environmental ambitions with protection for energy-intensive industries. A copy of the draft text, reviewed by Reuters, says: "The most sensitive political points remain to be resolved." However, legislators are close to reaching a compromise on how to strengthen the ETS, agreeing to double the rate at which the Market Stability Reserve (MSR) -- a measure designed to remove from the market surplus permits which have depressed prices -- soaks up excess allowances. EU nations are now ready to cede to Parliament's demands by moving forward by one year, from 2024 to 2023, the date from which permits in the MSR are canceled. How many free permits should go to heavy industry rather than being auctioned and how to use funds to promote low carbon innovation remain the toughest sticking points, EU sources said. The presidency is suggesting lowering the auction share from 2 percent to 2.5 percent if a cap is triggered on overall allocations that slashes free allowances across the board, known as the cross-sectoral correction factor (CSCF). One compromise proposal would allow poorer, coal-reliant nations in Central and Eastern Europe more generous provision to help modernize their industries. The European Council proposal rejects Parliament's bid to increase the size of the fund for innovation, but suggests some 100 million allowances could go to the fund from the auction. With a number of amendments still up for debate at next week's meeting but key elements tightening market supply provisionally agreed, analysts said the outcome of talks should not have a big impact on carbon prices. "Expectations are largely that the package will finally be approved at the meeting, so maybe a bit bearish if it gets pushed to another meeting, but not much of a big repricing in that event," Energy Aspects analyst Trevor Sikorski said. (Reporting by Alissa de Carbonnel and Robert-Jan Bartunek in Brussels and Susanna Twidale in London; Editing by Alexander Smith)