Battle lines forming as EU holds first debate on ETS reform

CO2 + H2O emissions. Germany, 2008. [dmytrok]

EXCLUSIVE / France, the UK, the Czech Republic and Slovakia are backing a more targeted approach for heavy industries, at risk of closing down or relocating abroad, due to increased pressure to reduce global warming emissions.

EU Environment Ministers are meeting in Luxembourg on Monday (26 October) to hold their first policy debate on the review of the EU emissions trading system (EU ETS) since the European Commission tabled its proposal on 15 July.

The ETS is the world’s biggest scheme for trading emissions allowances. It puts a price on CO2 emissions in an effort to guide investments into low-carbon technologies.

However, at less than €8 a tonne, the price of carbon is too low to drive the transition to clean energy.

The proposed ETS reform wants to address this by cutting the number of allowances on the market. Starting in 2021, the number of allowances — the total cap on emissions — will decrease each year by 2.2% compared to 1.74% currently. This aims at gradually turning the screw on polluting industries, which scientists say are largely responsible for human-made global warming.

>>Read: ETS reform: EU tightens screw on ‘carbon leakage’ handouts for polluting industries


Some industries are likely to still qualify for free allowances under the new scheme, including sectors such as steel, aluminium, chemicals, paper, fertilisers, lime and glass.

But energy-intensive sectors say they have been sacrificed in the reform, in order to finance the decarbonisation of the Polish energy sector.

“The cake is too small”, said one lobbyist. “We are left fighting with other energy-intensive industries for a smaller cake.”

Steelmakers in particular claim the reformed ETS, as it stands, would increase their costs and drive investment into other areas of the world, a shift known as “carbon leakage”.

“The Commission proposal puts at risk the viability of the steel industry, including the most efficient producers,” said Eurofer, the European steel industry association.

To reward the cleanest production, the EU executive uses a benchmarking system that gives free allowances to cover 100% of emissions costs for the 10% top-performing installations.

But meeting the 10% benchmark will simply be impossible for the steel sector, Eurofer claimed. “Since the steel industry is close to the technical limits, EU manufacturers have very limited abatement potential by 2030,” the trade association said. According to calculation made by consultants Ecofys, “around 50%” of steelmakers’ emissions would not be covered by free allocation or other forms of financial compensation in 2030 under the Commission’s current proposal.

“This would mean a cost of up to nearly €30 a tonne of crude steel in 2030, which would wipe out most of the industry’s profit margins,” Eurofer said in a position paper, dated 24 September.

Exaggerated claims?

Industry claims about the risk of carbon leakage are nothing new. The argument has been used successfully ahead of the current ETS period, which runs from 2013-2020, creating an oversupply of free allocations for big polluters which have depressed the carbon price.

So policymakers tend to take such industry claims with a grain of salt.

“Obviously when gradually organising scarcity — precisely to arrange the energy transition — there are interesting battles that will be played out on how we allocate these quotas and who will benefit from them,” said a senior EU diplomat who is taking part in the ETS revision talks.

Still, the arguments planted by energy-intensive industries seem to have taken root, at least partially.

Last week, France, the United Kingdom, the Czech Republic and Slovakia circulated a joint position paper in which they proposed a more gradual benchmarking system, so that a wider range of companies can benefit from free quotas.

Under the current European Commission proposal, quotas would be distributed according to a two-tier system to cover facilities that are the most exposed to carbon leakage. “If you are very exposed, you will be covered 100% in free allowances. But if you are less exposed, you will be covered at 30%,” the diplomat explained.

Best performers

The proposed system put forward by the four countries proposes to add some more intermediary steps — covering free allocation needs up to 70% and 50% in addition to 100% and 30%.

“Under a tiered approach to free allocation, sectors would be classified as being at (for example) high-, medium-, low-, or no-risk, depending on thresholds set on the basis of emissions and trade intensity criteria”, states the position paper, obtained by EURACTIV.

Tiering would ensure a more efficient distribution of free allowances than under the current system, ensuring free allocation is targeted at industries with the greatest need, while avoiding over-allocation to some sectors, the paper argues.

“What we want is a more targeted approach to ensure that only companies that are the most exposed to the risk of carbon leakage actually get 100% of their free allowances needs covered. With the current Commission proposal, in reality 93% of installations would receive 100% free allocations,” the diplomat said.

To prevent a free lunch for big polluters, the Commission has elaborated a special “cross-sectoral correction factor”, which applies for each industrial sector covered by the ETS. Instead of receiving 100% allocations for free, those would only receive 80%, a situation denounced as an injustice by Eurofer, which wants full coverage for sectors at “very high risk” of carbon leakage.

The four-country position seems to take some of those concerns into account.

“When looking at sectors, we cannot have a homogeneous system where 10% of the most efficient facilities are entitled to full coverage,” the diplomat said, pointing to large differences between activities like refining and steelmaking. “So we will have to identify the best performing installations sector by sector,” the diplomat said, adding this will require highly technical discussions and fine-tuning” in the coming year.

“Now, some will certainly tell us that all their facilities should qualify as being the most efficient — it’s part of the game.“

In the end, “maybe 15%” will be eligible, the diplomat continued, saying: “What we want is a quota allocation system that is dynamic and focused.”

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. 

Pollution credits were grossly over allocated by several countries during the 2005 initial implementation phase of the ETS, forcing down carbon prices and undermining the scheme's credibility, which prompted the EU to toughen up the system. Carbon prices have since remained stubbornly low at under €8 a tonne.

The proposed reform proposes tightening the screw on heavy polluters by restricting the amount of pollution credits available in the period 2021-2030.

Under the Commission proposal, 57% of allocations will be auctioned by member states, the same as in the current trading period (2013-2020). They are estimated to be worth €225 billion. 43% (6.3 billion allowances) will go to industry in free allocations, worth an estimated €160 billion. Those will be divided out, with the most efficient companies being prioritised. So the best performing companies will still get the benefit of free allowances.

177 sectors currently qualify for free permits. About 100 will drop off the list for 2021-2030. They are likely to be those that qualified because of their trade intensity rather than their emissions intensity.

The list will stay the same for ten years, rather than the five years of the previous trading period. This will make it more stable and give greater investor certainty. The new system will take into account production increases and decreases more effectively, and adjust the amount of free allowances accordingly. A number will be set aside for new and growing installations.

>> Read: ETS reform: EU tightens screw on 'carbon leakage' handouts for polluting industries

European Commission


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