EU carbon market compromise pleases no-one

Environmentalists criticise freebies to polluters, while business lobby claims carbon costs will drive manufacturing overseas

Maros Sefcovic leads Europe's energy union project (Pic: Flickr/epp group)

Maros Sefcovic leads Europe’s energy union project (Pic: Flickr/epp group)

By Megan Darby

The European Commission unveiled a “summer package” of energy and climate change policies on Wednesday.

It reaffirmed a central role for the EU’s carbon market, which is to more sharply cut emissions in manufacturing and power generation after 2020.

“When you talk to industry, the message we have been getting very consistently is: Fix the carbon price; the markets are not working properly,” said Maros Sefcovic, commission vice president for energy union.

With the proposed changes to market rules, he said: “We are sending a very strong signal to investors and to the markets.”

The package also showed how to decouple economic growth from greenhouse gas emissions, Sefcovic said, calling for cooperation towards a global climate pact in Paris this December.

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But neither green nor business groups were satisfied with the package. Both sides will lobby EU lawmakers and member states to tweak the package over the coming months, before it becomes law.

Environmentalists warned it did not go far enough to address a massive surplus of emissions permits, which has weakened the carbon price. Nor were they happy to see continued free handouts to polluters.

CAN Europe said 6 billion allowances worth an estimated €80-200 billion are to be given away in the period 2021-30.

“After more than a decade, the EU’s main climate instrument still lacks the teeth to make the polluter pay,” said Femke de Jong, policy advisor at Carbon Market Watch.

“Today’s proposal serves the interests of Europe’s largest polluters at the expense of the climate and taxpayers’ money.”

Green MEP Bas Eickhout agreed. “This ETS proposal is about muddling through instead of reforming,” he said.

“Gift after gift is given to the Central European power sector, while these companies continue to make enormous windfall profits by passing on to consumers costs that were never actually incurred.”

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Heavy industries, for their part, argued there weren’t enough freebies to safeguard European jobs from a wholesale flight of manufacturing overseas, to jurisdictions that don’t price carbon.

The Commission sought to address this “carbon leakage” concern by targeting free allowances at the energy-intensive sectors most at risk of relocation.

The number of sectors eligible for 100% free allowances will be scaled back from 180 to 50, with the remainder getting 30%.

“The Commission’s proposal is failing to safeguard the competitiveness of European industries,” said Markus Beyrer, head of lobby group Business Europe.

“By unnecessarily reducing the volume of free CO2 emission allowances so drastically, it raises the risk of investment leakage, exposing our industries to unfair competition from countries without comparable climate efforts.”

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Not all business leaders were hostile to tighter rules.

The Prince of Wales Corporate Leaders Group, which represents multinationals including Unilever, Shell and Coca Cola, argued a higher carbon price was necessary to drive low carbon investment.

“While we welcome elements of this new package of reforms with open arms, we remain cautious about its overall strength and potential impact,” said director Sandrine Dixson-Decleve.

“We are disappointed that the proposal has failed to address the huge oversupply of ETS pollution permits available to the carbon market, nor the inadequate rules to define risk of ‘carbon leakage’.”

Market stability reserve

Another bone of contention is design of the “market stability reserve” (MSR), conceived to temporarily withhold permits from the system and reduce oversupply.

Analysts forecast 550-700 million surplus permits will be transferred into the reserve in 2020.

The Commission is proposing to bring 250 million of these back into the system, awarding them to new entrants to the market. Another 50 million will be put towards an “innovation fund” to support carbon capture and storage, renewables and industrial energy efficiency.

“This proposal is a step backwards in curbing the oversupply of allowances on the market,” said Damien Morris, of think tank Sandbag.

“The nasty surprise for environmentalists is that we were cheated out of some of the ‘unallocated’ allowances we thought had been placed in the market stability reserve…

“We should be carving allowances for innovation and new entrants out of the new carbon budget, not pillaging the MSR for these.”

And CAN Europe said the cap on annual emissions should be tightened faster after 2020 than the proposed 2.2% a year.

“The proposal does not take into account that the EU Council explicitly decided that the EU should reduce its greenhouse gas emissions by ‘at least’ 40% ” said Wendel Trio, director of CAN Europe.

Aside from the carbon market measures, the summer package included changes to energy market design, energy efficiency labelling and consumer rights.

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