The concept of “carbon leakage” is a major area of discussion in the legislative proposal to revise the EU’s Emissions Trading System (EU ETS) for the post-2020 period. The Commission’s proposal continues the trend of awarding free allowances, effectively representing a financial subsidy of €160 billion, to heavy emitters without providing evidence for the need of such beneficial treatment. A new Carbon Market Watch policy briefing “Carbon leakage myth buster” brings the ongoing discussions on carbon leakage back to the facts.
To date there has been no compelling evidence that the EU ETS is forcing companies to move abroad and recent studies indicate that this is unlikely to happen in the future.
“Several industrial companies have overstated their carbon leakage risks in order to maximize their gains from selling freely obtained emission rights.” Commented Femke de Jong, EU climate policy advisor at Carbon Market Watch. “The annual reports of Lafarge and ArcelorMittal show that they have made almost €1 billion from the EU ETS in the past five years for example.”
At the same time, free allocation has disincentivised companies to invest in sustainable technologies with the result that certain EU industries have fallen behind the global average in carbon efficiency. Phasing out free allowances and increasing the share of auctioned allowances could instead mobilise up to €160 billion that can inter alia be ring-fenced for low-carbon innovations in the EU.
“An overhaul of the carbon leakage rules is needed to transform the ETS from a pollution subsidy scheme into a system supporting industrial frontrunners that are ready to invest in a climate friendly economy.”
The policy brief provides recommendations to the Commission proposal on how to phase out pollution permits and under what conditions industries should continue to receive free allowances. It also recommends that an enlarged innovation fund should be setting aside one billion allowances to finance investments in climate friendly innovations.
Femke de Jong, EU Climate Policy Advisor