Since its inception, the EU Emission Trading System (EU ETS) has been giving free allowances to most energy-intensive industries deemed at risk of carbon leakage. “Carbon leakage” refers to a hypothetical situation where companies transfer production to countries with weaker climate policies in order to lower their costs.
This policy briefing interprets the findings of an updated study by CE Delft that shows how energy-intensive companies in 18 European countries and the United Kingdom have massively profited from their pollution because they are deemed to be at risk of “carbon leakage”.
The free allocation has led to companies profiting from the EU carbon market by up to 50 billion euros between 2008-2019. Iron and steel, cement, petrochemicals and refineries sectors made the biggest gains, while most of the profits were generated in Germany, France, Italy and Spain.
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. At the same time, by handing out free pollution permits EU governments forgo auctioning revenues that could have been spent on further climate action.
The review of the EU ETS is an opportunity to set this straight.
To avoid windfall profits and drive innovation, the upcoming revision of the carbon market rules should:
- End free allocation of pollution permits for energy-intensive industries to incentivise climate action in this sector
- Ensure that 100% of auctioning revenues are invested in further climate action, just transition and international climate finance
- Support energy-intensive industries by dedicating a share of auctioning revenues for climate-friendly industrial innovation and assist the frontrunners that want to invest in clean breakthrough technologies.