Battle over carbon freebies ahead of EU policy launch

As heavy industries lobby for carbon price relief, experts warn against weakening flagship EU climate policy

EU steel producers say carbon pricing makes them uncompetitive (Pic: colink/Flickr)

EU steel producers say carbon pricing makes them uncompetitive (Pic: colink/Flickr)

By Megan Darby

Major polluters will get handouts until 2030 in the world’s biggest carbon market, under an EU policy package to be launched on Wednesday.

The European Commission is reducing the number of free emissions permits available to industries like cement, steel and power.

But economists and researchers called for deeper reforms to the system, warning lax rules could undermine the EU’s flagship climate policy.

“Of course too many emission allowances have been given away for free,” said Ottmar Edenhofer, chief economist of the Potsdam Institute for Climate Impact Research.

Carbon leakage

The EU emissions trading system (ETS) was devised to give heavy industry and power generators an incentive to clean up their act.

Those industries have intensively lobbied against the extra cost, however, saying it will drive manufacturing (and jobs) overseas – a phenomenon dubbed “carbon leakage”.

In a typical statement, UK Steel is arguing tomorrow’s package risks stifling the sector’s competitiveness and limiting its ability to invest in innovation.

“The steel sector wants to play its part in meeting the UK’s carbon targets and is actively researching lower carbon production methods,” said director Gareth Stace.

“But it needs support and the current regulatory regime – and particularly the EU ETS – is hindering rather than helping.”

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Yet UK think tank Sandbag last October found steel giants ArcelorMittal, Tata and Duferco were among the top ten hoarders of excess carbon permits, shielding them from the need to improve efficiency.

A surplus of permits has built up since the financial crisis dented demand, sending the carbon price tumbling. Polluters are paying €7-8 a tonne.

Edenhofer advocated a minimum price for allowances traded on the market.

“This would help stabilise investors’ expectations and hence foster financing clean technology innovation and upscaling,” he said.

Loophole patrol

Femke de Jong, policy analyst at Carbon Market Watch, agreed but told RTCC it was unlikely to happen.

Instead, the Commission is counting on a “market stability reserve” to prop up the price. This will deal with the glut of permits by temporarily withholding some from the market.

De Jong is watching hawkishly for loopholes that might weaken this measure. She expressed concern over suggestions in a leaked draft some of the reserve permits could be given to new entrants to the market.

“It undermines our ambition level up to 2030,” she said.

And she dismissed industry arguments: “So far, there has not been any evidence of carbon leakage. All of the industrial sectors were able to pass on the cost of carbon in their product prices.”

Damien Morris of Sandbag was more sympathetic to carbon leakage concerns, but argued the support could be better focused.

“You want to have the incentives for industries to stay in Europe but to get clean,” he said.

“We had hoped that the Commission was going to reduce the number of free allowances available to manufacturers by making them more targeted. But it still looks like they are trying to create a lot of breathing room for industry.”

Sandbag is pushing for more direct support for deep decarbonisation options like carbon capture and storage, to defuse the tension between industry and climate advocates.

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Meanwhile, the International Emissions Trading Association cautioned against overlapping policies that could erode the carbon market’s effectiveness.

Regulations to promote energy efficiency and renewables are more expensive ways to cut emissions, the industry group argued.

Such measures reduce demand for carbon allowances, contributing to the surplus and depressing the price.

“The EU ETS is the most cost-effective policy instrument,” said IETA’s Sarah Deblock. “If they do introduce these other policies, we need to have greater transparency on what the impact will be.”

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