WWF Climate & Energy Blog

By Sam van den Plas, WWF Europe

This article was first published in PointCarbon’s Carbon Market Europe

On 5th May, the European Commission proposed an update of the EU ETS carbon leakage list for 2015-2019. The new list would offer free pollution permits to a staggering 175 of 245 sectors, and thereby cover over 95 percent of industrial emissions in the ETS. The extreme generosity on display is President Barroso’s payback for the support he was given by fellow EU Commissioners reluctant to accept the 2030 climate and energy framework proposed in January.

This Commission largess also shows the extent to which influential big polluters have convinced EU officials that without substantial carbon price exemptions their competitiveness will be hit. Despite the ease with which their attractively simple message on carbon leakage can be contradicted by economic theory and ex-post assessments (including by the Commission’s own consultants), all of those on the old list make it to the new one.

This has real consequences. The free pollution permits for those on the list represent a transfer of wealth from public budgets to private industry. In 2013, this handout amounted to about 840m allowances, worth nearly €4bn. Both the value involved and the list’s impact on emissions cuts mean the criteria for inclusion must be carefully drawn. They are not.

The parameters for assessing carbon leakage overestimate the risk of relocation abroad – resulting in unjustified free pollution permits. Firstly, the assessment’s calculations use an assumed price of 30€/ton CO2 – between 3 and 6 times above the Commission’s own reference price up to 2020.Secondly, the new carbon leakage list continues to cover sectors trading with any non-EU country, regardless of whether those countries have comparable carbon pricing policies. This means the carbon leakage list ‘protects’ EU players who are actually competing with some rivals who are on a level playing field. In the context of the UNFCCC negotiations, where the EU is expecting other countries to show more climate ambition before 2020, such generosity could backfire. Moreover, the deplorable wasting of public goods on this scale threatens the credibility of the ETS as an adequate policy instrument delivering broad societal benefits.

This is particularly worrying given the evidence of the current policy’s unintended consequences, which have lead to windfall profits, subsidised exports of energy-intensive products, and state-aid overcompensation. Free allocations and state-aid for industry also mean that EU taxpayers are paying relatively more for CO2 emission allowances. This adds up to the prospect that the EU ETS will remain in oversupply with an ineffective carbon price signal for at least another decade.

EU Member States and the European Parliament have adequate justification to refuse this new carbon leakage list. Indeed, how can a proper political judgment be made of this list without quantification of the forgone auctioning revenues at country level? The Commission must come up with an alternative to handing out blank checks to industry, and restore the‘polluter pays’ principle with an EU ETS that works for the climate.

Energy-intensive industries are an important part of our economies, and they are facing economically unfavourable conditions. They suffer from weak demand due to the poor economy, aggravated in the longer term by structural overcapacity, changing comparative advantages and competition from emerging markets. Even if all EU climate and energy policy was written exactly to industrial players’ liking, they would still face difficult decisions about asset rationalisation and industrial structure and practices. Their strategy to working to delay the impact of climate policy decisions is therefore a potentially self-defeating distraction.

The false idol of industrial competitiveness has not only troubled reform of the European carbon market; it also overshadows a broader policy debate over post-2020 climate and energy policies. As with all false idols, it is time this one is exposed. European society cannot afford distraction from efforts to maintain and grow a sustainable industrial base in Europe by focusing on the region’s comparative advantage. A long-term industrial policy targeted at the development of energy saving and renewable products and technologies should form the basis of a major industrial policy initiative. The EU ETS, through smart use of auctioning revenues, offers an excellent opportunity to mainstream climate policy into industrial policy to build a cleaner, more innovative and competitive future.

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