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EU to hand out 6.3bn ETS allowances post-2020

11 Jun 2015 19:29 (+01:00 GMT)
EU to hand out 6.3bn ETS allowances post-2020

London, 11 June (Argus) — The EU may hand out an estimated 6.3bn free allowances to industry worth around €150bn ($169bn) in the fourth phase (2021-30) of the EU emissions trading scheme (ETS), according to a leaked impact assessment by the European Commission.

By comparison, 5.5bn allowances worth around €50bn have been allocated for free to industry in the third phase (2013-20) of the scheme, according to non-governmental organisaton (NGO) Carbon Market Watch.

This implies that the annual amount of free allowances given to industry will be trimmed by around 8.4pc in the post-2020 period to 630,000/yr from 687,500/yr in the current phase.

The EU industrial sector's demand for EU ETS allowances post-2020 will mostly be determined by the bloc's manufacturing output and associated greenhouse gas (GHG) emissions, alongside other factors such as the speed of uptake of renewable energy sources and low-carbon technologies.

But as economic trends are unpredictable a decade into the future, it is difficult to calculate how many allowances EU industry is likely to need and how much of a supply squeeze the planned reduction in free allowances will imply.

But NGOs have criticised the commission's proposed free allowance provisions as overly generous, even if the amount to be handed out will be slightly lower in phase 4 than in phase 3.

Free allowances are given to energy-intensive firms that are deemed to be at a competitive disadvantage to overseas competitors owing to their exposure to EU ETS costs, which raises the risk of their migration to non-EU regions where GHG emissions are not priced.

The commission paper assesses the ability of industrial sectors to pass on EU ETS costs to their consumers, as this determines if a company is exposed to carbon leakage and so is eligible to receive free allowances.

In phase 3, the industry sectors deemed vulnerable to carbon leakage cover activities that collectively are responsible for more than 97pc of industrial emissions covered by the EU ETS. "While for a sector to be on the carbon leakage list, is described in the recitals of the [EU ETS] directive as an exception, it has de facto become the norm," the commission concedes.

"There is general understanding that most carbon-intensive sectors are able to pass through at least a part of the carbon costs," the commission paper further acknowledges. For example, the steel sector was able to fully pass on in its product prices the costs of EU ETS allowances that it obtained for free, it adds.

The draft paper assesses the likely impact of a range of four reform options for the EU ETS, but it does not single any one out as more favourable than the others.

In phase 4, free allocation is expected to cover the majority of cement sector emissions, two-thirds of oil refinery emissions and around three-quarters of fertiliser sector emissions under all four options, it finds.

"There may even be a risk that the compliance costs are more than fully alleviated and windfall profits are generated in some cases," the impact assessment concedes.

Based on these findings, Carbon Market Watch criticises the commission's proposal as the continuation of "a blanket approach" to carbon leakage, "when their own analysis shows that this has led to huge windfall profits for industry sectors".

The NGO further criticises the commission's implied assumption that after 2020 the EU is still the only country "acting on climate change".

"There is an inherent risk that other countries accuse the EU of wrongly subsidising its own industry based on the premise that nobody else is taking climate change seriously, at a time when the world is trying to reach a global climate change deal," it warns.

The proposed provisions for post-2020 free EU ETS allowance allocation to EU industry "prejudges a successful 21st Conference of the Parties (Cop 21) outcome in Paris in which all countries implement climate policies", it warns.

This not only appears to be wrong climate diplomacy, it also does not reflect the fact that an increasing number of countries are pricing GHG emissions, Carbon Market Watch says. These other emissions markets — such as California, Quebec, certain Chinese pilot schemes and South Korea — often have higher emissions prices than the EU ETS, it points out.

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