MEPs in the Parliament's Industry Committee have called for the EU's emissions trading regime to be tightened, bringing an end to free emissions allowances by 2020. But questions remain about the treatment of select industries exposed to 'carbon leakage' concerns.

MEPs in the Industry (ITRE) Committee yesterday (11 September) backed a report by Swedish Liberal MEP Lena Ek, who is the Parliament's shadow rapporteur on a Commission proposal to revise the EU ETS for the period beyond 2013, with 30 in favour, 21 against and one abstention.

End to free pollution?

The Ek report supports the Commission's original proposal to grant no further free emissions allowances to the power generating sector after 2013, meaning all electricity producers would have to purchase their emissions permits at auction after that date.

The power sector was widely criticised for making 'windfall profits' during the first EU ETS trading period (2005-2007). According to allegations, the profits, estimated to amount to billions of euros, were amassed when energy firms with a significant portfolio of 'low carbon' power generation simply sold the emissions permits they received freely (but did not actually need) at auction. 

Barring concerns expressed by Poland, which relies heavily on coal for electricity generation and where power firms argue that they need some level of free allocation to remain competitive, it is likely that the other political groups will back the push for full auctioning for the power sector, according to sources in Parliament close to the file.

Special treatment

Less certain is the issue of special treatment for energy-intensive sectors that may be affected by outside competition from countries with less stringent CO2 emissions reduction schemes.

In the event that international climate talks falter, the Ek report calls on the Commission to list which sectors could benefit from exemptions from the EU ETS by 1 June 2010 at the latest.

In its initial proposal, the Commission said it would release such a list only in 2011, allowing time for data collection and to study appropriate exemption measures.

Heavy industry in the EU is concerned that, without a solid international agreement in place, it would not be able to compete on a global scale with producers operating in countries where pollution is cheaper. This uncertainty exposes the EU to the risk of 'carbon leakage', they say, meaning that EU industries would be forced to take their factories, jobs and - crucially - emissions beyond the EU's borders. 

The Commission should therefore identify which sectors should be exempted from the EU ETS - either in the form of free allowances or in the form of special protection measures from 'dirtier' third country imports - before international negotiations wrap up in Copenhagen in December 2009.

But Brussels stresses the need to await the outcome of global climate change talks before specifying exemptions, since doing otherwise would send the wrong signal to the EU's international negotiating partners. 

In the coming weeks, the issue is likely to remain subject to heated debate within the Parliament's Environment (ENVI) Committee, the lead committee on the EU ETS proposal. Irish Christian Democrat MEP Avril Doyle is the ENVI Committee's rapporteur, and her report will be voted upon by committee members in early October.

Both Doyle and Ek agree that exemptions for certain sectors should not be identified before the end of 2009. Nonetheless, the MEPs argue that industries need investment certainty as soon as possible, and are putting pressure on the Commission to commit to an earlier publication date for any potential list of exempt sectors.

Shipping sector next?

The Ek report also calls on the Commission to put forward a proposal on the inclusion of the shipping sector under the EU ETS.

"I have included the shipping in my report, since no regulation - neither nationally, nor regionally nor globally - exists to regulate CO2 emissions in the shipping sector, which contributed about 1.5% of total global CO2 emissions from energy in 2005," Ek said in a press statement. 

The Commission has indicated that such a proposal could come "at a later date".

Dividing the cake

At least one further issue is set to inspire controversy in the debates surrounding the EU ETS revision.

Parliament and Council are at odds over how monies obtained from auctioning revenues should be spent. Member states do not want Brussels to dictate how these monies, collected in national coffers, are to be used.

But the Ek report calls for at least 50% of the funds to be put toward clean technology investments or anti-deforestation projects in developing countries, with the remaining funds to be allocated within the EU towards clean technology research and development or other climate change-related measures. A majority of MEPs in the ENVI Committee are said to support this aspect of the Ek report, Parliament sources say.