Carbon Market Watch

For fair and effective climate protection.

European Commission restricts free pollution permits to carbon-intensive industry

02 Feb 2017

The European Commission last week finalized a decision to reduce the amount of free pollution permits handed out to energy intensive industry for the period up to 2020. This decision comes at a time when the European Parliament and EU ministers are deliberating over how many pollution permits heavy industry should get for free after 2020.

The Court of Justice of the European Union had ruled in April last year that carbon-intensive industries have received too many free pollution permits from the EU’s Emissions Trading System (EU ETS) and asked the Commission to recalculate.  According to the ruling by the Court of Justice too many free allowances have been given out to energy intensive industry in the past.

The ruling comes as a slap in the face for big polluters  ̶  such as Esso, ExxonMobil, Shell and Tata Steel  ̶  who had brought the case against the Commission claiming that they had received fewer free permits than they were entitled to.

The Commission tightens the amount of free pollution permits up to 2020

 The Commission has decided to reduce the number of free pollution permits in the period 1 March 2017 to 2020 by up to 37 million allowances according to experts from Point Carbon. According to the Commission, the decision is not expected to have a material impact on the vast majority of industrial installations subject to the EU ETS. However, it sends a strong political signal to co-legislators to stop the over-generous handing out of free pollution permits to industry after 2020.

 Lesson learned for phase IV

Reflecting carbon costs in product prices is the objective of the EU ETS, but almost all industries can currently pollute for free. Policymakers proposed to continue this practice of rewarding polluters after 2020, despite evidence that industry have profited by over €25 billion.

At a time when the European Parliament is getting ready to vote on tightening the rules for the next trading period, the court’s decision comes as a timely reminder that nothing less than comprehensive reform with significantly higher emission cuts can fix the current system.

The upcoming vote can stop the presents to big polluters after 2020

 On 14 February, the European Parliament is scheduled to vote on the EU ETS rules for the post-2020 period. Backed by close to 100.000 citizens asking Members of the European Parliament (MEPs) to support an ambition ETS reform, it is now up to the MEPs to adopt a position that aligns the EU ETS with Europe’s climate goals under the Paris Agreement.

The position adopted by the Parliament’s Environment Committee (ENVI) is a step into the right direction, even if more changes to the system are needed in order to limit global warming to below 1.5°C.

A major concern of the position adopted by ENVI is that polluters will continue to receive free permits for their pollution, even though this has led to a situation under which industry has profited enormously. A welcome change of the rules could be seen in the cement sector, where a first step was taken to stop the practice of free handouts while protecting the sector’s competitiveness. The committee’s report introduces a scheme in which importers will also need to pay for their pollution.

Even though the cement industry supported an import inclusion scheme in the past, changes to the rules on sector’s coverage faces stiff opposition from an incumbent industry that is determined to preserve its profitable high-carbon model. Many within the industry remains deeply split on the issue.

A welcomed move for low-carbon frontrunners

In the meantime, low-carbon frontrunners are welcoming the new measure since it will help to incentivize innovation and investments into low-carbon materials. At the end of the day, policymakers will have to choose: between a system that continues to reward polluters at the expense of the climate or one that can drive European industrial innovation towards a low carbon future.

by Agnes Brandt