“Dynamic allocation” – an industry model for windfall profits from free emission allowances at the expense of taxpayers
The EU Emission Trading System (EU ETS) covers just over 40% of the EU’s greenhouse gas emissions from the industry and power sector. After each year, companies participating in the system must surrender enough allowances to cover all of their emissions. For the 3rd trading phase from 2012 to 2020 companies are supposed to purchase their emission allowances under the EU ETS through auctioning as the default allocation method. However, the production from European industrial sectors that is deemed to be exposed to a significant risk of “carbon leakage” [i] is getting protection by receiving their allowances to emit CO2 for free. This concept has been adopted during the revision of the EU ETS and is valid for the 2020 climate package from 2013 to 2020.
Questions over how the potential risk of carbon leakage will be addressed in the 2030 climate and energy framework have recently gained importance. Earlier this year, the European Commission launched a stakeholder consultation process on the post-2020 carbon leakage provisions. Dynamic allocation, in combination with an industry fund, has been proposed by recent papers prepared by the chemical company BASF[ii] and Ecofys commissioned by Dutch industry[iii] as an option to tackle carbon leakage concerns post-2020.
These papers show that the main objective of the proposal for dynamic allocation is to keep the door open for windfall profits while failing to incentivize industry to modernize their production facilities. This rebuttal recommends that auctioning of emission allowances should be the default allocation method for all sectors to reward efficiency and low-carbon solutions and keep low-carbon investments in Europe.
Read full rebuttal here