HOW ENERGY-INTENSIVE COMPANIES CASH IN ON THEIR POLLUTION AT TAXPAYERS’ EXPENSE

Executive summary

This report interprets the findings of an updated CE Delft study that shows how energy-intensive companies in 20 European countries have massively profited from their pollution because they are deemed at risk of “carbon leakage”. “Carbon leakage” refers to the hypothetical situation where companies transfer production to countries with weaker climate policies in order to lower their costs. Under the current EU Emissions Trading System (EU ETS) rules, industrial companies that are believed to be at risk of “carbon leakage” are awarded free emission allowances.

Overall, heavy industry has been able to make over €25 billion from the EU ETS during the 2008-2015 period. Windfall profits occur when industrial companies are over-subsidised for their pollution. This can happen by receiving too many free emission allowances which are then sold for a profit on the market, from using international offsets and from making consumers pay for non-existent carbon costs. The update also contains country sheets showing the sectors and companies that have profited the most from the EU ETS between 2008 and 2015.

There are at least four problems related to the current system:

1. Free allocation has resulted in significant windfall profits for corporations. During 2008-20152 energy-intensive companies made over €25 billion from the EU ETS. Most profits were made in Germany, the United Kingdom, Spain, France and Italy.#
2. European taxpayers are picking up the bill as governments forego income and loss of revenues from auctioning pollution permits. As a result of free allocation of emission allowances, less money is available for investments in the climate friendly transition of the European economy. In the 2008-2015 period, governments have given out 11.8 billion free pollution permits and have, thereby, missed out on at least €143 billion in auctioning revenues.
3. Emission reductions will stall over the next 15 years – unless there is an urgent change of rules. Giving away free pollution permits reduces the incentive for companies to produce more efficiently.
4. The Paris Agreement levels the playing field across the global economy after 2020. The risk of “carbon leakage” diminishes along with the number of countries where companies could relocate their production to avoid climate policies. Furthermore, studies have not been able to find evidence for “carbon leakage”.

The lessons learnt so far are important to ensure that further windfall profits at the expense of taxpayers are avoided and, instead of subsidising pollution, European governments will invest in innovations that lead to climate friendly societies. The ongoing legislative process to revise
EU ETS rules for the post-2020 period provides an important opportunity to revise the current “carbon leakage” rules. Future-oriented climate policies are needed in order to enable improved industrial carbon performance in Europe.

Key recommendations:

• Deliver a more meaningful carbon price signal that rewards green innovators
• Phase out the free allocation of pollution permits
• Target free allowances only to those that really need it
• Annually reduce the amount of free allowances that an installation receives (benchmark) in line with the overall decarbonisation pathway of the EU ETS
• Invest more auctioning revenues in climate friendly innovation and support frontrunners that want to invest in breakthrough technologies
• Assist local communities and workers in regions impacted most strongly by the ongoing transition to a decarbonised economy by setting up a Just Transition Fund