(Updated)

15 July 2015, Brussels. Today’s publication of the EU Emissions Trading System review proposes to increase pollution subsidies to industry to at least €160 billion after 2020. Carbon Market Watch strongly criticizes the proposal for watering down already weak provisions in the EU ETS directive and ignoring the polluters-pay principle.

The EU’s Emissions Trading System (ETS) review presented today by the European Commission aims to introduce new rules to the existing EU ETS Directive to make it fit to implement the EU’s 2030 at least 40% climate target, compared to the 20% climate target by 2020.

One of the key elements of the revision is the way pollution permits are made available to industry installations covered by the EU ETS. While energy companies have to buy their pollution permits at auction, the proposal keeps the current trend of handing out permits for free to industry for the hypothetical risk that putting a price on carbon in Europe will drive manufacturing abroad. To address this phenomenon called “carbon leakage”, it is proposed to give industries more than six billion pollution permits for free in the 2021-2030 period, even though no evidence for carbon leakage has ever been detected.

“After more than a decade, the EU’s main climate instrument still lacks the teeth to make the polluter pay and drive emission reductions. Today’s proposal serves the interests of Europe’s largest polluters at the expense of the climate and taxpayers’ money” commented Femke de Jong, EU climate policy advisor at Carbon Market Watch.

“Handing out pollution permits worth hundreds of billions of euros for free on the assumption that other countries will not take similar action is not only damaging the process for a strong climate treaty in Paris, it also ignores that revenues from auctioning these permits could fill public budgets to invest in Europe’s climate-friendly economy.” de Jong added.

Just a week on from agreeing on the Market Stability Reserve that tries to tackle surplus allowances, today’s proposal includes a number of elements that weaken current provisions, such as making available 250 million of the temporarily stored surplus allowances for heavy industry, increasing the amount of free allocation of pollution permits after 2020 from 30% to 100% for most industrial sectors, and prolonging the existing provision for lower-income Member States such as Poland to temporarily grant their carbon-intensive power producers free pollution permits from 2021 to 2030.

“The harmful elements proposed today could undermine the objective of the EU ETS to decarbonize our economy, making the current rules the lesser of two evils.” de Jong commented. “It is now up to the members of the European Parliament and Member States to ensure that today’s proposal turns the EU’s carbon market from a pollution subsidy scheme into an effective tool to tackle climate change.”

ENDS.

Information for journalists:

Short summary of the EU ETS revision as published today:

• In order to implement EU’s 2030 climate target the linear reduction factor (LRF) by which the cap on the amount of EU ETS allowances is reduced each year is increased from the current 1.74% to 2.2% from 2020 onwards. Unfortunately, the 2.2% is insufficient to bring the EU ETS sectors in line with EU’s 2050 climate objective. Analysis by the Commission[1] shows that the LRF should be at least 2.4% to meet our long-term climate objective.
• In the 2021-2030 period, 55% of the total EU ETS allowances will be auctioned by the EU Member States, 2% will be set aside with the proceeds used to create a Modernization Fund for lower-income countries, around 2.5% will be set aside with the proceeds used to create an Innovation Fund and around 40% of the total EU ES allowances are given away for free to industrial sectors to address the potential risk of carbon leakage.
• A new reserve is set up using unallocated allowances resulting from application of the cross-sectoral correction factor (±100-150 million allowances) as well as 250 million allowances from the Market Stability Reserve. The new reserve will be used to hand out additional free pollution permits to new entrants and to industrial production increases. Since otherwise these 250 million allowances would have been prohibited from flooding the EU ETS before 2030, while they are now allowed to return to the EU ETS before that time, this undermines the EU’s 2030 climate ambition.
• An absolute majority of industrial sectors (representing ±95% of industry’s emissions) will receive 100% free allocation of pollution permits after 2020, while in the current EU ETS directive these industrial sectors will only receive 30% free allowances after 2020. Even those industrial sectors that are not at risk of carbon leakage will still receive 30% of their pollution permits free of charge after 2020.
• Ten lower-income Member States are also allowed to give their power producers free pollution permits after 2020, even though the power producers in the other EU countries need to buy their permits at auction. Originally, this provision was introduced as a temporary measure to be phased out by 2020. The equivalent market value of the free allowances needs to be invested in the modernization of the country’s energy system.

Why are the current rules the lesser of two evils?

The increase of the linear reduction factor is the only change to the EU ETS that would increase the environmental ambition, annually reducing the cap on the amount of EU ETS allowances by 48 rather than 38 million allowances after 2020. This means that the total amount of EU ETS allowances are reduced by an additional 550 million during the 2021-2030 period. However, at the same time, the Commission proposes to make available an additional 250 million of the surplus allowances which would have otherwise been stored in the Market Stability Reserve, and another 150 million leftover allowances from the current trading period up to 2020. This could increase the amount of EU ETS allowances by an additional up to 400 million during the 2021-2030 period.

Finally, while the current rules in the EU ETS directive would phase-out the pollution subsidies to heavy industry and carbon-intensive power producers post-2020, today’s ETS review proposes to continue with these pollution subsidies also after 2020.

Background reading

• EU ETS policy briefing: What is needed to fix the EU’s carbon market
• Media Briefing: Myths and realities around carbon leakage in Europe
• Carbon Leakage Rebuttal: “Dynamic allocation” – an industry model for windfall profits from free emission allowances at the expense of taxpayers

[1] See SWD(2014) 15, EC’s 2030 Impact Assessment here (p.45 footnote 55)