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By Bloomberg

European Union negotiators reached an agreement to bring forward to 2019 a reform to help curb a surplus of permits in the world’s biggest emission market.

Representatives of EU governments, the European Parliament and the European Commission decided Tuesday to start a stability reserve in the EU emissions trading system two years earlier than originally proposed, according to Latvia, which holds the EU rotating presidency. Carbon futures rose to a two-month high.

“That is an ambitious and balanced agreement,” Ivo Belet, lead lawmaker on the market reform in the European Parliament, said in an interview. “It has broad support across political groups.”

The planned reserve would automatically absorb allowances in the EU cap-and-trade program if the surplus exceeds a fixed limit, and release them to the market in the event of a shortage. That would ease an excess of permits that led to a 65 percent drop in the price of emissions since 2008.

The glut of allowances is above 2 billion, according to EU estimates. Under the deal, the amount corresponding to 12 percent of allowances in circulation would be deducted from auctions and placed in the reserve for 12 months starting each September until the accumulated surplus falls below 833 million, according to two people with knowledge of the matter. In the first year, 8 percent of allowances will be put into the reserve between January and September, said the people, who asked not to be identified, because the meeting was private.

Carbon Dioxide

If the excess drops below 400 million, the EU will return 100 million allowances. One permit gives the right to emit one metric ton of carbon dioxide.

EU Climate and Energy Commissioner Miguel Arias Canete said the deal was very good and fair. The commission will now focus its efforts on preparing a post-2020 overhaul of the ETS and plans to present it before the summer break in August, he said on Twitter.

The starting date and scope of the reserve kept member states divided for more than a year. Germany and the U.K. were pushing for an introduction as early as 2017, while Poland headed a group of countries opposing the start of the reform before 2021. Last week, the Czech Republic and Lithuania left the Polish-led coalition, paving the way for an early start.

The “compromise agreement is another step to restoring the credibility of the EU ETS and ensuring that an efficient and effective carbon market system remains at the heart of Europe’s climate change response,” said Sarah Deblock, Brussels-based director for European policy at the International Emissions Trading Association.

Reserve Allowances

Negotiators agreed to strengthen the reform by placing in the reserve 900 million allowances that were delayed at government auctions in 2014-2016 and permits not used by emitters before 2020, the Latvian presidency said.

“The deal is good for the climate; it’s good for the economy,” said Matthias Groote, a lawmaker who oversees the draft law for the Socialist group in the EU Parliament.

The compromise envisages a shorter exemption of the extra allowances awarded to some states under the so-called solidarity provision from being included in the reserve. The exemption will last until 2025 instead of 2030 proposed by EU governments, according to Bas Eickhout, member of the Greens group in the European Parliament.

Carbon futures for delivery in December rose as high as 7.75 euros ($8.71) per ton Wednesday, the highest since Feb. 25, on the ICE Futures Europe exchange in London. The contract was trading at 7.62 euros at 8:54 a.m.

Clean Energy

Lawmakers also agreed to call on the European Commission to consider whether to set up a fund to promote clean energy and innovative projects, according to the people with knowledge of the matter. Such a fund could be based on 50 million allowances and be created under a planned overhaul of the EU market for the next decade.

The draft law will need to be confirmed by EU nations and by the European Parliament before entering into force. The Latvian presidency will debrief ambassadors from member states on the outcome of the talks Wednesday, with a decision on whether to approve it planned at a later date.

In the EU Parliament, the environment committee will vote on the deal on May 26, according to Belet. The whole assembly will most likely cast its ballot during the plenary session starting July 6, he said.