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Carbon leakage: industry subsidies, windfall profits instead of climate action

The success of the ETS revision hinges on its ability to make the polluter pay, rather than paying the polluter. Handing out free pollution permits contradicts the EU Treaty principle that polluters should pay.

Since the year 2013, power companies buy all of their emission allowances at auction. However, manufacturing industries that have been deemed at risk of carbon leakage continue to receive up to 100% of their CO2 allowances for free. These generous exemptions in the form of free pollution permits have led to windfall profits for large energy intensive companies on the backs of EU citizens.

What is Carbon Leakage?

Carbon leakage is a term used to describe the hypothetical situation where stringent climate policies would force companies to move their production abroad to countries with less ambitious climate measures to lower their production costs. This can theoretically lead to a rise in global greenhouse gas emissions. 

What evidence is there for “carbon leakage”?

There has so far been no compelling evidence that EU’s climate policies are forcing companies to move abroad. A study commissioned by the European Commission concluded in 2013 for example that no conclusive evidence of carbon leakage occurrences can be detected, see here.

Relocation of European industry due to the ETS is also unlikely to happen in the future: A recent academic paper finds that the future impact of more ambitious climate policies on EU companies moving their production abroad is likely to be “extremely limited”. A ten-fold increase in the carbon price would cause exports to fall by only 0.5% and would increase imports by 0.07%, even assuming a complete phase-out of free pollution permits (100% auctioning) see here.

Some industry groups have been arguing that there is a risk of “investment leakage”: new investments going outside of Europe. However, investment decisions are made based on a broad set of factors in globally competing industries, where the EU carbon price signal is a negligible factor. Given the surplus projections this is unlikely to change in the next trading phase. As with carbon leakage, there is no evidence for such investment leakage due to the ETS. The best way to support industries to fully decarbonize and to stay in Europe is to auction more allowances and invest the revenues in the European economy. Free allocation does little to tackle investment leakage as it is uncertain whether the companies invest the resulting profits in Europe, or somewhere else (or just give the profits to their shareholders). Moreover, investment leakage might not even lead to a rise in global greenhouse gas emissions, if the investments are done in more efficient plants than those in Europe. This is by no means just rhetoric, as India and China have particularly efficient cement production for example (more efficient than the European and global average) see: here.

The polluter should pay

Auctioning is the most cost-efficient, simplest, fairest, and most transparent way to allocate allowances, fully reflecting the polluter pays principle. Increasing the share of auctioning can support larger investments in the tools needed for further decarbonisation and climate resilience, in the EU and internationally.

Existing provisions to protect the manufacturing industry in the EU against the potential risk of relocation due to the ETS apply for the period from 2013 to 2020. Currently, more than 150 sectors, representing more than 97% of industrial emissions, are deemed to be at risk of “carbon leakage” and receive free pollution permits. Between 2013 and 2020, in total 6.6 billion allowances will be given out for free to industry with a monetary value of €50 billion (see here, p. 29).

A key question is how the concept of “carbon leakage” will be addressed in the next ETS trading round from 2021-2030. In its ETS revision proposal, the European Commission recommends to continue many of the existing rules, including the hand-out of around 6.3 billion free pollution permits in the post-2020 period. The Commission anticipates that the carbon price will increase from around €8 today to an average €25 in the 2021-2030 period, which would represent an indirect financial subsidy of €160 billion to large polluters (see here, p. 27).

CAN Europe is against such blanketed pollution subsidies and supports a move to 100% auctioning. We are calling for fairer and stricter rules which would ensure that free pollution permits are significantly limited through a tiered and focused system. Free pollution permits should not be given to industries that do not face significant and proven competitiveness risks.

 

Latest Publications

  • Letter to Deputy Ambassadors on a Governance framework compatible with the Paris Agreement

    This letter was sent ahead of the COREPER meeting on 24 November 2017 Dear Deputy Ambassador, This Friday, 24 November, you will be discussing the proposed Regulation on the Governance of the Energy Union. With that in mind we are writing on behalf of our EU-wide network to highlight those aspects of the draft legislation that we consider critical to effective implementation by the EU of the Paris Agreement.
  • European and African NGO recommendations for an EU-Africa Summit that puts climate action at the forefront

    Ahead of the EU-Africa summit taking place in Abidjan, Côte d’Ivoire on November 28-29, European and African NGOs working on climate change, energy and sustainable development jointly identify some important areas of cooperation to enhance European and African climate action.
  • Report: Juncker Plan backs billions in fossil fuels and carbon-heavy infrastructure

    The European Union is set to continue a funding tool that in last two years has lent billions of euros for fossil fuels projects, finds a new study from CEE Bankwatch Network, CAN Europe, Counter Balance and WWF European Policy Office.
  • Joint NGO statement on the ETS revision

    Being serious about the Paris Agreement:Stop the ETS funding coal, Start a meaningful carbon price This Agreement [...] aims to [...] making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development. Paris Agreement, Article 2(1)c We, the undersigned, urgently appeal to Representatives of European Parliament, Council and the European Commission to ensure that European power and industry are put on the right track to rapidly and cost-effectively reduce their carbon emissions. The European Union was instrumental in designing the Paris Agreement. Now it must implement it. On 8th November, the aforementioned decision-makers will discuss final changes to the EU Emissions Trading System (ETS) for the post-2020 period. It is vital that these changes enable the ETS to help deliver the Paris commitments. The recently published UNEP report underlines the urgency to act now in order to ensure that the 1.5°C target remains attainable [1]. One important discussion topic will be the design of the ETS funds. It is crucial that ETS funds stop subsidizing coal plants. We are glad to see that the European Parliament as well as seven Member States [2] have called for ending this misuse of funds. To reach the “well below two degrees” goal agreed at Paris, the International Energy Agency’s (IEA) modelling shows that unabated coal in Europe must fall to zero by 2030: This means that the ETS must no longer fund this obsolete and polluting technology and needs to accelerate a socially just transition instead. The second crucial topic is how to ensure a meaningful carbon price that drives decarbonisation throughout the 2020s and beyond. This can only happen if the cap on the ETS emissions continues to tighten in line with the Paris climate goals, and is adjusted downwards to account for progress. Without this change, the EU carbon market will remain on an inadequate decarbonisation trajectory and risks another decade of irrelevance, leaving the EU lagging behind on green growth and innovation. Fundamentally, the EU ETS must ensure a meaningful carbon price in line with the Paris climate goals, while at the same time stop subsidizing high-carbon intensity technologies such as coal. We count on your support. Kind regards, Carbon Market WatchCEE Bankwatch NetworkCenter for Transport and EnergyChange PartnershipClimate Action Network (CAN) EuropeEfdeN RomaniaInternational Young NaturefriendsSandbagWWF EPOYoung European Federalists11.11.11 Notes: [1] Under current trends, it is expected that in 2030 global efforts to remain on a 1.5°C pathway are 16 to 19 GtCO2 off track. UNEP (2017). The Emissions Gap Report 2017. Available here. [2] Non-paper by Denmark, France, Germany, Luxembourg, the Netherlands, Sweden and the UK Joint NGO statement on the ETS revision
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