Additional profits of sectors and firms from the EU ETS 2008-2019

This report by CE Delft was commissioned by Carbon Market Watch


This study has calculated the additional profits that sectors and companies have made from the EU ETS between 2008 to 2019 for the fifteen most CO2-intensive sectors plus aviation in nineteen EU countries.

In our study we have investigated three types of profits:

1. Profits from overallocation of free emission allowances.
2. Profits from using cheaper international offsets for compliance.
3. Profits from passing through (part of) the opportunity costs of freely obtained allowances into product prices.

Profits from overallocation of emission allowances have been generated because industry – excluding aviation – received more free allowances (37 M) than needed for covering their emissions in the period 2008-2019. On average, the CO2-intensive sectors in those countries did not need to pay for any emission allowances to cover their carbon emissions under the EU ETS. Instead, they could earn from selling their freely obtained allowances in excess of demand at the spot market resulting in additional profits worth an estimated € 1.6 billion. Especially the cement sector and other building materials (bricks and lime) have profited from this, resulting in around € 4 billion additional profits from simply taking part in European climate policies.

Next to this, industry has profited from using cheaper international offsets for compliance. Companies were entitled to use a certain amount of credits obtained through the Clean Development Mechanism (CDM) or Joint Implementation (JI) scheme for compliance between 2008 and 2020. As the price of these credits was substantially below the price of an emission allowance, this has created additional profits worth € 3 billion between 2008 and 2019. The iron and steel sector has profited most from this exchange (€ 850 million).

The largest amount of additional profits was earned from ‘cost pass-through’. The design of the EU ETS, with a hybrid mix between free allocation and auctioning for emissions above the benchmarks, make it likely that product prices contain CO2 costs of marginal firms which acts as a producer surplus to other firms. There is ample empirical evidence that such producer surpluses have been stimulated by the EU ETS even though most firms do not intentionally pass through their carbon costs.

In our research we have used a cautious estimate of the possibility to pass through the costs to accommodate the uncertainty that is involved in such calculations. We also estimated the loss in profits that result from the loss in market shares from those higher prices. For all sectors the additional profits from passing through carbon costs have outweighed the loss in profits from the reduced market shares resulting from cost pass-through. Our estimates indicate that an additional profit of € 26 to € 46 billion was earned between 2008 and 2019 from cost pass-through in industry. Especially the iron and steel sector has profited (€ 12-16 billion) followed by refineries ( € 7-12 billion).

In total, the additional profits for the fifteen sectors in the nineteen countries ranged between € 30 to over € 50 billion in the period 2008-2019. In absolute terms, additional profits were the highest in the iron and steel sector (€ 11.9 to € 16.1 billion) followed by the cement (€ 7.1 to € 10.3 billion) and refineries (€ 5.9-11.3 billion).

For the aviation sector, given that airlines have been net buyers of allowances, the additional profits from cost pass-through and the use of international credits have been outweighed by the need to buy allowances. The sector therefore did not experience additional profits as the industry did – the total balance was a 150 million loss on participating in the EU ETS.

For the future, several developments may result in a change in the additional profits. On the one hand, additional profits will be lower as the possibility to use cheaper international credits has ceased and the total number of free allowances will be reduced in Phase 4 which effectively reduces the additional profits. On the other hand, the higher CO2 prices and the possible instalment of a CBAM, if not accompanied with an abolishment of free allocation, will result in higher additional profits. It is difficult to predict beforehand which factor will dominate. We state here that it is likely that additional profits from the ETS may remain dominant in Phase 4 unless improvements are implemented in the context of the ‘Fit for 55’ agenda.

The most effective means of reducing additional profits is to drastically reduce the number of freely issued allowances. The conclusions of this research should read that free allocation may not be fit for purpose in the future of European climate policies.

As the costs seem to be passed through, it results in additional profits at the expense of European consumers. At the same time, despite the issuance of free allowances, the higher costs may have resulted in a loss in market shares. This all casts doubt on the appropriateness of free allocation in preventing carbon leakage, although this should be investigated in more detail in future work.

Making allocation more dynamic, reflecting actual output, would solve part of these problems but comes at a cost. First, individual companies may no longer factor in carbon costs in their production decisions thereby resulting in overproduction. Second, a muted carbon price signal through the value chain will reduce consumer choices for low-carbon products. Therefore the main policy recommendation for policy makers would be to investigate other ways to ensure European industries decarbonise while remaining competitive on a global playing field: either through enhanced investment subsidies, such as through the Innovation Fund, or through the instalment of Carbon Border Adjustment Mechanisms and the phase-out of free allocation. Both solutions may be at odds with each other as an effective carbon border adjustment mechanism that is WTO compliant may also need to take into account the subsidies that are given to European industries.


Additional profits of sectors and firms from the EU ETS 2008-2019