This article is part of our special report Industrial Renaissance.
European manufacturers' lobby IFIEC Europe on Thursday (27 February) launched an attack on the EU's Emissions Trading System (ETS), opposing current reform plans and calling for drastic changes to prevent a flight of investment abroad.
Industrial companies such as steel and paper producers, alongside electricity generators and airlines, are forced under the ETS to surrender a carbon permit for every tonne they emit.
Manufacturers have long lobbied against measures to strengthen the system while countries outside the European Union are not adopting comparable policies to tackle climate change.
IFIEC's latest criticism is a sign that a proposal published last month by the European Commission to establish a reserve of carbon permits to curb supply in the ETS will face strong opposition to becoming law amid heightened concerns from politicians about derailing the EU's economic recovery.
"The reserve does not solve the real structural problems of the (permit) allocation for industry. Therefore we are not happy with the approach taken by the Commission," IFIEC's Annette Loske said in an emailed response to questions.
The Commission's so-called "market stability reserve" proposal follows on from its backloading plan, which was finally passed into law this week after two years of political wrangling.
The Commission wants backloading and later the reserve to revive the ailing ETS and spur low carbon investment by driving up carbon prices from below €7 per tonne of emissions to levels that encourage companies to invest in low carbon technologies.
To help European industrial firms compete with rivals in regions with less stringent emission limits, they get the majority of their permits for free.
The Commission confirmed last month that the allocations of free permits would be retained until at least 2019, even though environmental campaigners have called for them to be slashed following the drastic fall in prices from 30 euros in 2008.
IFIEC on Thursday called for an overhaul of what it described as the "unrealistic" free allocation method from 2020, saying that it would otherwise "stop investments in carbon intensive industries in Europe".
In an effort to get factories to invest in cleaner equipment, the current system is designed to hand out just enough free permits to meet the needs of the very cleanest plants, with firms that emit more required to buy additional certificates to cover the shortfall.
IFIEC said the system is flawed because even the cleanest plants will have to pay for some permits.
"We need a dynamic system being based on actual production levels," Loske said, adding that the current method's use of historical output data did not support the expansion of efficient industrial production.
IFIEC's call for ETS reforms was among a list of recommendations signed by 137 CEOs of IFIEC member companies including ArcelorMittal and BASF urging EU leaders to support domestic manufacturers when they discuss 2030 energy and climate change targets next month.
Lobbying is intense from all sides in Brussels after the Commission in January provided an outline of proposed 2030 climate and energy policy, including a target to cut emissions by 40 percent from 1990 levels.
Renewable producer groups say innovation is the best route to ensuring jobs and growth, while IFIEC warns that setting regulations to meet the targets will derail fragile economic growth.
"These ever increasing surcharges create an unprecedented burden for manufacturing industries, which cannot pass through these costs to their customers," Philippe Darmayan, chief executive of steelmaker Aperam, said in a statement.
The Commission says it is working to help industry and has an aspirational target that 20 percent of EU gross domestic product should come from the sector. The share of GDP from industry has been falling rather than rising and stood at 15.6% in 2012.
Leaders from all 28 member states meet to discuss the 2030 goals at a European Council summit on March 20-21, though they are not expected to reach agreement until they meet in June.
With a turnover that reached around €90 billion in 2010, the EU's Emissions Trading System is the world's largest carbon market. Around 80% of it is traded in futures markets and 20% in spot markets.
The ETS aims to encourage companies to invest in low-polluting technologies by allocating or selling them allowances to cover their annual emissions. The most efficient companies can then sell unused allowances or bank them.
But carbon prices are currently far too low to provide that incentive, with prices currently hovering at €5 per tonne, below the €20 or €30 analysts believe is needed to make utilities switch to lower carbon energy generation.
To deal with the issue, the European Union has approved a "backloading" plan, which seeks to delay the sale of 900 million carbon permits until later this decade and prop up carbon prices.
The European Commission’s latest proposal is to establish a "market stability reserve" of carbon permits to curb supply in the ETS.