Europe’s industry polluters make €50 billion in carbon market windfall profits
BRUSSELS, 7 June 2021 New analysis shows that the energy-intensive industry across Europe has profited up to €50 billion from 2008 to 2019 as a result of the free allocation of pollution permits under the EU Emissions Trading System (EU ETS). The findings in the report from independent environmental consultancy CE Delft highlight the need to end this market failure as the EU carbon market rules are revised.
The sectors profiting most from pollution payouts are iron and steel, refineries, cement and petrochemicals sectors.
The report covers 18 EU countries and the United Kingdom. Most profits were generated in Germany, the UK, France, Italy and Spain.
The report identified three ways in which industry has secured a total of up to €50 billion windfall profits through the scheme from 2008 to 2019:
- Companies passed through the “costs” of freely obtained emission allowances in the product price, paid for by the end-consumer. For example in the iron and steel sector (€12- 16 billion) and refineries (€7 – 12 billion);
- Companies were awarded too many free emissions allowances that they could sell for a profit on the market. For example in the cement sector (€3.1 billion) and petrochemical sector (€600 million);
- Companies bought cheaper international offsets (until 2020) to comply with their targets and were able to sell remaining free allowances for a profit on the market. For example in the iron and steel sector (€850 million), refineries (€630 million) and cement (€610 million).
Sam Van den plas, Policy Director at Carbon Market Watch said:
“In the middle of a climate crisis, no company should be allowed to pollute for free, let alone be rewarded for holding onto a highly polluting business model. This market failure at the heart of one of Europe’s main climate policies needs to be corrected. EU governments should stop handing out free pollution subsidies and instead auction all emission allowances for investments in further climate action.”
The energy-intensive industries receive their pollution permits for free because companies claim that they face a competitive disadvantage due to EU carbon pricing rules. However, the report highlights that the billions of windfall profits generated due to free allocation are a significant economic benefit for these industries.
The report moreover shows that most of the industrial sectors pass on at least part of the ‘cost’ of free allowances in product prices in which case they accrue significant additional profits.
Sander de Bruyn, Senior Economist at CE Delft and lead author of the report said:
“Free allocation has helped companies in the first years of the ETS to get accustomed to carbon trading. However, in the long run, it has important drawbacks: it mutes the price signal for low carbon investments, results in product price increases at the expense of the European consumers and may not be fully effective in preventing carbon leakage.”
The EU carbon market rules will be revisited as part of the “Fit for 55” energy and climate policy package this summer.
As part of the EU Green Deal, the European Commission is considering a Carbon Border Adjustment Mechanism (CBAM) as an alternative to the existing carbon leakage measures under the EU ETS. A CBAM that replaces the free allocation would imply the end of windfall profits. A CBAM alongside free allocation would mean double protection of Europe’s industrial sector and even bigger windfall profits, thus dramatically reducing the effectiveness of the EU carbon price.
Agnese Ruggiero, Policy Officer at Carbon Market Watch said:
“A carbon border adjustment measure must be above all a climate tool. If it’s designed properly and fairly, it can support a clean industrial transition globally. That means that the measure must replace all current EU free pollution handouts and its revenues must be used wisely to drive innovation and to provide climate finance to countries that most need it.”
No carbon cost means no incentive to produce more efficiently or to invest in breakthrough technologies. The free allocations to energy-intensive sectors stand in stark contrast with the power sector – which pays for its EU ETS permits since 2013 – and has seen significant emission reductions over the past years. At the same time, heavy industry pollution has stagnated and -under the current rules- is not expected to go down over the next ten years.
Planning to hand out another 6.5 billion pollution permits for free over the coming decade, EU governments risk missing out on over €300 billion auctioning revenues. Making all polluters pay would mean that governments have more resources to spend on climate action that benefits society at large.
The launch of the report is accompanied by an event “Return of the Allowances – Fixing the EU carbon market rules to drive industrial innovation” 7th June, 15:00 – 16:30 (registration here).
Notes to editors:
- CE Delft study: Additional profits of sectors and firms from the EU ETS 2008-2019. CE Delft is an independent research and consultancy organisation specialised in developing innovative solutions to environmental problems.
- Carbon Market Watch briefing: The Phantom Leakage – Industry windfall profits from Europe’s carbon market 2008-2019
- Most windfall profits were made by the iron and steel sector (EUR16.1 billion), cement sector (EUR10.3 billion), petrochemicals sector (EUR 5.0 billion) and refineries (EUR11.3 billion).
- Most profits were generated in Germany (EUR9.8 billion), the UK (EUR6.0 billion) France (EUR5.5. billion), Italy (EUR5.6 billion) and Spain (EUR5.5 billion)
- Company-based data is available in the study at the country level.
25 Oct 2021