The report warned that the EU's flagship instrument for reducing CO2 emissions could turn into a trap that commits the bloc into increasing rather than reducing emissions for most of the coming decade unless swiftly revised.
The group's calculations show that the scheme, which covers some 12,000 industrial installations and half of the EU's emissions, will at best achieve some 32 million tonnes of CO2 savings during the 2008-2012 period. This is a small fraction of the annual emissions of 1.9 billion tonnes from these installations, it said, adding that the EU would have been better off by simply imposing a cap on one of Europe's largest polluters over the same period.
Moreover, the report argued that the meagre reductions are unlikely to take place in Europe because there is an ample supply of cheap international offset credits. As a result, European emissions could actually increase by 34% from current levels by 2016, it said.
The EU ETS was revised for the post-2012 period and a tighter cap was introduced. However, Sandbag warned that the recession has rendered these caps obsolete, as over-allocation of permits for some sectors will come back to haunt the integrity of the scheme after 2012.
Heavily over-allocated sectors, notably steel and cement, could bank their unused allowances for use when the economy picks up again, the report argues. By then the carbon price will have risen, but the sectors will already possess the permits they need and thus have no incentive for improving their efficiency.
"Unless they are adjusted to reflect our new circumstances, the EU ETS risks becoming an albatross around the neck of European climate policy, a carbon trap rather than a carbon cap, obstructing the mitigation efforts of the EU and its member states," said Sandbag campaigner Damien Morris.
Sandbag argues that 1.8bn permits will likely be carried over to the post-2012 phase, undermining investment in low-carbon technologies. This could be corrected by increasing the EU's emissions reduction target from 20% to 30% by 2020 and tightening the cap accordingly, it suggested.
For this to happen, the European Commission has estimated that 1.4bn allowances would have to be set aside in the 2013-2020 period (EurActiv 03/05/10). But while countries like the UK and the Netherlands and more recently France have expressed their support for a higher target, member states in Central and Eastern Europe say it would be too expensive.
Sandbag's analysis shows that Romania received the biggest surplus in 2009 in absolute terms, while Cyprus got the largest surplus compared to emissions.
The European Commission agrees in broad terms with the analysis underlying the Sandbag report, in that supply exceeds demand for allowances in the current trading phase, Maria Kokkonen, spokeswoman for Climate Action Commissioner Connie Hedegaard, told EurActiv.
"We do not, however, share all the policy conclusions drawn from it. The EU ETS has undergone a fundamental reform as part the climate and energy package and is on course to be even more effective in the future. The priority is to properly implement these fundamental reforms in a timely manner," she said.
The next important step in the implementation will be defining the benchmarks for allocating free allowances post-2012, Kokkonen added.
The Commission submitted its first draft for review on Thursday (9 September).