By Barbara Lewis and Susanna Twidale
BRUSSELS/LONDON (Reuters) - European Union diplomats have approved a proposal to begin reform of the world's biggest carbon market in 2019, Latvia, the holder of the EU Presidency, said on Wednesday.
Discussions have dragged on for months over the plan to begin operating a Market Stability Reserve (MSR) to remove some of huge surplus of carbon allowances that has depressed prices on the EU's Emissions Trading System (ETS).
"Member states adopt Market Stability Reserve file to improve operation of carbon market! MSR will be operational from 2019," the Latvian Presidency tweeted after a closed-door meeting of diplomats voted through a deal agreed in outline earlier this month.
Six countries - Poland, Romania, Bulgaria, Cyprus, Hungary and Greece - voted against, two EU diplomats told Reuters, but that was not enough to block the deal.
It will now be voted on by a committee of the European Parliament at the end of the month, and it is then expected to be signed off by EU environment ministers in June and put before a plenary session of the parliament in early July.
EU diplomats say there should be no major surprises and at parliamentary level, the outline deal was welcomed by the main political groups.
But carbon traders said the market reaction was muted because of uncertainty over how many unallocated allowances, or permits unallocated because factories have been closed and fewer than expected new ones set up, would be go into the reserve.
EU benchmark carbon prices were flat at 7.63 euros a tonne.
Unallocated allowances will be transferred directly to the MSR in 2020 and their future usage will be decided on as part of a wider ETS review being carried out by the European Commission, the Latvian presidency said.
Analyst estimates of the number of unallocated allowances vary greatly from 300 million to around 800 million by 2020.
"The market is left with the residual threat that some permits could be sold back from 2020," Mark Lewis, analyst at Paris-based financial services group Kepler Cheuvreux, said.
"Until there is more clarity on if this will happen and how many unallocated allowances could be returned, price upside is likely to be very limited."
(Writing by Nina Chestney in London; editing by Jason Neely and David Evans)
