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05/12/2016

European businesses make billions from free carbon quotas

Climate & Environment

European businesses make billions from free carbon quotas

Free carbon quotas can make large sums of money for the carbon-intensive industries.

[Les Chatfield/Flickr]

Europe’s carbon-intensive industries still reap excessive benefits from the carbon market, according to the NGO Carbon Market Watch. EurActiv France reports.

The question of free carbon quota allocations has periodically made it onto the negotiation agenda since the EU launched the carbon market ten years ago, as a way to force 11,000 industrial sites to reduce their CO2 emissions. This is a particularly burning issue now, with the reform of the quota system currently under way.

While all quotas were initially free, this has changed: in theory, free quotas should now be the exception and auctioned sales the rule. But this does not take into account the intense lobbying of the sectors involved, which argue that their role as job creators and their position in Europe’s industrial fabric should entitle them to free quotas.

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“Studies financed by lobby groups, like those behind the fertiliser industry, show that certain sectors must continue to obtain free quotas in order to remain competitive,” Carbon Market Watch stated.

€27 billion bonus

The carbon market entered its third phase in 2013, during which only industries genuinely exposed to the risk of delocalisation, a problem also known as “carbon leakage”, are entitled to free quotas.

But according to the NGO Carbon Market Watch, which commissioned an investigation on the subject by the expert group Delft, businesses can turn these free quotas into hard currency. Between 2008 and 2014, businesses cashed in €27 billion from free quotas.

If a company possesses too many quotas, they can sell them on the carbon market. And the existence of this market pushes up the price of the final product: the cost of the CO2 quotas necessary to produce one tonne of steel must be added to the cost of producing the steel itself. According to Delft, over a dozen industries benefit from this situation to make “undue profits”.

In total, the carbon-intensive industries have made an extra €15 billion of profit, thanks to the fact that the carbon market has bumped up the price of their products. France handed out 100 million surplus carbon quotas between 2008 and 2014, worth a total of €800 million, Delft reported.

France’s €10 billion gap

The surplus of quotas has brought enormous gains for the cement sector, including Lafarge. But it is steel company ArcelorMittal and oil refiner Total that are seen as the biggest winners of the system.

According to the experts’ calculations, the price increases associated with the carbon market have brought windfall profits for these companies: €862 for Bersillon, a branch of ArcelorMittal, €298 for Total and  €176 million for Lafarge.

“The French government lost €10.4 billion in revenue, by giving away 866 million tonnes of quotas between 2008 and 2014,” the Delft study stated. The government collected €435 million by selling quotas over this period, half of which was invested in climate projects.

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Background

The EU's Emissions Trading System 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. Companies can trade allowances as an incentive for them to reduce their emissions. Countries can also sell permits to the market.

The European Commission has proposed a series of reforms to the ETS.

The European Union has agreed a 2030 framework for climate and energy policy based on the following commitments:

  • To reduce the bloc's greenhouse gas emissions by 40% compared to 1990 levels, a binding objective which has to be broken down to individual member states based on their GDP per capita and may not be met by carbon offsets;
  • The use of carbon offsets to meet further emissions reduction commitments made in international climate talks;
  • A 27% renewable energy target that is binding at an aggregate European level but voluntary for individual member states;
  • An indicative target to increase energy efficiency by at least 27%;
  • Non-binding shale gas recommendations which could be made binding after a review in 2015;
  • A market reserve facility for the Emissions Trading System, with the power to withhold or release up to 100 million allowances;
  • and to implement the fuel quality directive by 2020, imposing a 6% reduction in greenhouse gas emissions from combustible fuels in the EU.