EU clamps down on "carbon leakage" handouts for polluting industries
The EU Commission proposed reducing the number of free carbon emission allowances to around 50 sectors and increasing the annual rate at which these allowances are reduced. Industries which should still qualify for allowances include sectors such as steel, aluminium, paper and chemicals.
Energy intensive industries will continue to receive free carbon emissions allowances, as compensation for the EU’s stricter climate rules, under planned reforms to the EU’s Emissions Trading System (ETS), but fewer will be granted.

The European Commission plans to reduce the number of free allowances and the number of industries that qualify for them, it said today (15 July). It is also speeding up the annual rate at which it reduces allowances, compared to the current ETS trading period.

But the plans include safeguards for the international competitiveness of EU energy intensive industries, the executive said.

About 50 sectors, including all the major industrial ones, will continue to receive free allowances from 2021, the next ETS trading period, because of the risk of carbon leakage.

Carbon leakage is when businesses transfer production to countries with weaker restraints on greenhouse gas emissions because of lower costs.

Industries that are likely to still qualify for the free allowances are expected to include sectors such as steel, aluminium, chemicals, paper, fertilisers, lime and glass.

The ETS is the world’s biggest scheme for trading emissions allowances. Regulated businesses measure and report their carbon emissions, handing in one allowance for each tonne they release. Permits can be traded on the markets as an incentive for companies to reduce emissions.

Pollution credits were grossly over allocated by several countries during the 2005 initial implementation phase of the ETS, forcing down carbon prices and undermining the scheme’s credibility, which prompted the EU to toughen up the system. Carbon prices have since remained stubbornly low, at about €7.4 a tonne.

2030 target

Energy and Climate Commissioner Miguel Arias Cañete hailed the reforms as the first decisive step to enshrining the bloc’s commitment to reducing greenhouse gas emissions by at least 40% by 2030 in EU law.

The reforms announced today (15 July) in Brussels, must be backed by the European Parliament and Council of Ministers before they become law.

>> Read: EU leaders adopt ‘flexible’ energy and climate targets for 2030

Today’s reforms cut down on the number of allowances, divided into permits for auction by governments and free allowances to industry, available to the market from 2021-2030.

They also increase the rate of annual reduction of allowances from the current 1.74% a year to 2.2%. That should deliver a drop in emissions of 43% compared to 2005 by 2030, the Commission said.

It would cut 556 million tonnes of carbon emissions in ETS-regulated sectors over the decade, the same as the UK’s annual emissions, the executive said.

15.5 billion permits

The Commission expects a total 15.5 billion allowances worth €387.5 billion to be made available during the 2021-2030 trading period. It is working with a figure of €25 euros per permit.

57% of them will be auctioned by member states, the same as in the previous Emissions Trading System trading period of 2013-2020. They are estimated to be worth €225 billion.

6.3 billion allowances (43%) will go to industry in free allocations, worth an estimated €160 billion. Those will be divided out, with the most efficient companies being prioritised. So the best performing companies will still get the benefit of free allowances.

Less efficient business will have to buy permits, incentivising them to improve their efficiency and cut emissions.

177 sectors currently qualify for free permits. About 100 will drop off the list for 2021-2030. They are likely to be those that qualified because of their trade intensity rather than their emissions intensity.

The list will stay the same for ten years, rather than the five years of the previous trading period. This will make it more stable and give greater investor certainty.

The benchmark to decide how to reward the better performing companies will also be based on new data, rather than the pre-crisis data of the current period. This will take into account technological progress and lower emissions during recession.

The new system will take into account production increases and decreases more effectively, and adjust the amount of free allowances accordingly. A number will be set aside for new and growing installations.

Member states

EURACTIV understands the 57% share of allowances for member states was also a stipulation of national governments for their support to the 40% target, agreed to by EU leaders in October.

The Commission is putting pressure on nations to use the revenue to compensate electricity-intensive industries, such as aluminium, which have carbon costs passed to them in the price of electricity. Any that do must ensure that they don’t break EU competition law.

But the executive also encourages nations to put revenues from their auctions toward climate finance, helping non-EU countries adapt to climate change, or social policy to ease the transition to a low carbon economy.

While there is no system of hard enforcement, member states will be compelled to report on how the revenues are spent. At least 50% of the money “should” go to climate related policies, according to the Commission.

Currently, member states spend 80% of the cash on climate policies on average, EURACTIV was told.

Energy package

The ETS reforms are part of the Commission’s energy summer package. They include a new Modernisation and Innovation Fund.

>> Read: Poorer EU nations get carbon money for backing emission target

The package also includes a revamp of energy efficiency labelling policy for products. The label will be rescaled to make it clearer. EURACTIV exclusively revealed those plans on 1 July.

>> Read: A+ energy labels will be ditched

The Commission also launched a consultation into how best to redesign energy markets to help consumers and increase shares of renewable energies.

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