In early September, the council conclusions on the 2030 climate and energy framework were leaked. Worryingly, the draft text stated that the current practice of giving free pollution permits to heavy emitters needs to be maintained while “dynamically” allocating these permits based on actual production levels. A rebuttal by Carbon Market Watch shows that this approach could result in EU taxpayers paying industry an extra €130 billion worth of free emission allowances, while the public have never been presented proof that carbon leakage actually exists.
Questions over how the potential risk of “carbon leakage” will be addressed in the EU’s 2030 climate and energy framework have recently gained significance. Earlier this year, the European Commission launched a stakeholder consultation process on the post-2020 carbon leakage provisions. The submission by Carbon Market Watch recommends that auctioning of emission allowances should be the default allocation method for all sectors. This would ensure that the polluters pay, efficiency is rewarded and low-carbon investments are retained within Europe.
Industry has however opted for a different approach in which they will receive even more free pollution permits after 2020. Under this proposal, the number of free allowances given to industry is not subject to a cap anymore, removing the incentives for industry to reduce their emissions. Not requiring any effort from industry to decarbonize post-2020 risks Europe leading the world along a 4°C pathway to dangerous climate change.
Taxpayers will be picking up the bill to implement this extremely complex system, which can be described as the perfect example of red tape. And for what reason? So far, no evidence for carbon leakage was detected[i]. In contrast, industrial sectors have received more free pollution permits than the amount of carbon they emitted[ii], equaling billions in windfall profits[iii]. After 2020, industry should thus not be subsidized for its pollution any further.
Full auctioning should replace free allocation of emission allowances because free allocation shields industrial sectors from any carbon price, thereby reducing their incentive to invest in innovative, low-carbon technologies in Europe. It is no surprise that currently the most efficient cement production occurs in Asia (particularly China and India). Also in the steel sector, the European installations often perform worse than the global average.[iv] In contrast, auctioning of allowances gives companies an incentive to produce more efficiently so they do not fall behind compared to their competitors abroad.
It is blind sighted to continue with an approach that has done little to address the competitiveness of Europe’s industry base at the expense of taxpayers’ money. EU’s heads of state therefore need to rethink how to spend their scarce public resources. The billions of euros of subsidies to heavy emitters can be better spent to support the frontrunners that actually want to invest in low-carbon solutions in Europe. Industry can only survive in Europe when it becomes more efficient, creative and innovative than the rest of the world. If EU leaders want industry to sustain in Europe, stopping with subsidies to pollute and starting an industrial innovation fund dedicated to energy savings, and renewable production processes is the best way forward.
For more please read our recommendations briefing for the Market Stability Reserve and future EU Emissions Trading Scheme reform proposals.