EU Carbon Talks Next Week Could Clinch Reform Deal

European Union talks next week could clinch a deal to shake up the world's biggest carbon market after a change of position by the Czech Republic removed a major obstacle to an early start for reforms.

The EU Emissions Trading System (ETS) is meant to be central to efforts to cut carbon emissions, but a huge surplus of carbon allowances caused by recession means they are not worth enough to drive a switch from highly-polluting coal to greener fuels.

Negotiations between the European Commission, the European Parliament and member states on Tuesday will aim to agree the legal text on when to launch a Market Stability Reserve (MSR) to hold some of the surplus permits in reserve.

Diplomats said it was possible the talks could deliver a final deal, although another round was scheduled for May 26.

Months of stalemate over a start date for the reforms ended on Wednesday, when the Czech Republic broke ranks with a group of countries led by Poland, whose economy relies on coal, that opposed any reform before 2021.

After the Czech Republic changed position, member states agreed on a start date of Jan. 1, 2019, according to a text of Wednesday's deal seen by Reuters, while the European Parliament had said the MSR should already be operating by Dec. 31, 2018.

Analysts said the parliamentary wording could allow allowances to be withdrawn before the MSR was operational, but at most the difference between the two positions in terms of market impact was six months.

"It's all on the table. The major parts of the deal are struck," Marcus Ferdinand, an analyst at Thomson Reuters Point Carbon, said.

News that Wednesday's closed-door meeting of EU diplomats had broken resistance to reform before 2021, the Commission's original proposal, drove the carbon market slightly higher, although traders said it was partly priced in.

On Thursday, prices hit a two-month high of 7.64 euros.

Parliamentary sources also said a deal was close, although there could be haggling over an innovation fund to use carbon allowance revenue to support low carbon technology.

Member states did not support the innovation fund, although they backed a solidarity fund that would award carbon allowances to low income nations.

Once a text is agreed, final endorsement by EU member states and the European Parliament should be a formality.

That agreement would also pave the way for much deeper reforms, which the Commission has said it will announce before August provided an MSR deal has been reached.

By Barbara Lewis