The EU Emissions Trading System (EU ETS) is currently one of Europe’s key tools to decarbonise its industrial sectors, but it has so far failed at its task. Industrial emissions in Europe are stagnating, and no emission cuts are foreseen in the period up to 2030, or beyond.

The main problems are the numerous exemptions and the excessive handouts of free pollution permits to industries that have led to a situation where the biggest polluters are able to make profits from the system. Over the past years, the EU ETS has generated up to 50 billion euros in windfall profits for private companies regulated by the system.

These free pollution permits represent a market failure within the EU ETS since the external costs of carbon pollution are not internalised. Companies have no incentive to clean up their act, and citizens carry the cost of climate impacts. By handing out free pollution permits EU governments also forgo auctioning revenues that they could spend on further climate action.

Full decarbonisation of the steel, cement and chemicals sectors is both necessary and feasible in order to meet the Paris climate goals and to enable a thriving industry in a climate-safe future. It is also an opportunity to build back better as Europe emerges from the pandemic.

This requires a change in the current regulatory framework in which innovators struggle to get access to the market dominated by incumbents that are reluctant to change their profitable and highly polluting business models. A full phase-out of the free allocation of pollution permits is a key priority and a condition for introducing a Carbon Border Adjustment Mechanism (CBAM), as proposed by the European Commission under the EU Green Deal.

Carbon Market Watch calls for an end to the free allocation of emission allowances for energy-intensive industries. Beyond revising the carbon market rules, the EU should also put in place other measures to bring these sectors in line with the European Green Deal.  These include increased funding for industrial innovation, carbon performance standards for the production and consumption of energy-intensive materials, improved public procurement rules and provisions to drive a circular economy.