EU member states have handed out nearly €100 billion worth in free CO2 pollution credits to industry since 2013 – more than they earned themselves from the EU carbon market, a new study shows.
While European Union legislators aim to reach a deal on the EU carbon market reform by the end of the year, a report by WWF published on Tuesday (29 November) sheds light on the issues at stake.
Ongoing negotiations are taking place among EU institutions to revise the current emission trading scheme (EU ETS), which puts a price on every tonne of CO2 emitted by around 10,000 industrial plants – mainly in the power sector and heavy industry.
The total number of emission allowances is limited and decreases over time, in line with the EU’s climate objectives.
However, a large part of emissions from energy-intensive industries and the aviation sector are exempted and can benefit from free allowances. In total, 53% of emissions in the EU ETS were covered by free allocations, the study shows.
In the period ranging from 2013 to 2021, EU countries collectively raised €88.5 billion in revenues from the ETS, according to the WWF report, which is based on data reported by EU member states and information collected by the European Environment Agency (EEA).
During this period, Germany was the primary beneficiary from ETS revenues, with €18.4 billion collected during the nine years considered, while Poland comes second with €13.5 billion, followed by Italy and Spain.
But industries benefitting from free allowances also made handsome profits from the scheme. During that period, they raked in a total of €98.5 billion in free allowances, according to the study – more than what EU member states collected during the same period (€88.5 billion).
Carbon leakage
Free allowances were distributed to industry as a way of preventing ‘carbon leakage’, or the relocation of polluting factories outside the EU to lower production costs.
They were given “in the hope that these sectors would reduce their emissions,” the WWF says. But “unsurprisingly, these sectors have not reduced their emissions to any significant extent”, and in some cases have made profits selling the surplus free allowances on the market, the report says.
In the coming years, carbon leakage fears should be addressed by the upcoming Carbon Border Adjustment Mechanism (CBAM), a tariff that will gradually apply the EU’s ETS price also to imports.
The steel industry, which receives much of its ETS credits for free, has campaigned to maintain free allowances until CBAM is fully up and running.
“We need a cautious transition from existing carbon leakage measures to a carbon border adjustment with a structural solution for exports,” said said Axel Eggert, director general of Eurofer, the European Steel Association.
According to Eurofer, the free ETS credits are necessary to finance new “green steel” projects that require heavy investments. “In this very volatile economic, energetic and geopolitical situation, the steel industry needs to rely on an enabling regulatory framework to accelerate the green transition,” Eggert stressed.
How EU member states spent their ETS revenues
Under the existing Emission Trading Scheme directive, EU member states are required to spend at least half of their auction revenues in climate action – deploying renewables, carbon capture and storage, improving energy efficiency or district heating.
However, the report argues that the rules are “far too weak” and only “invite” governments to spend half of their ETS revenues on climate action. According to the research, over half of the member states did not follow the directive’s recommendation.
For instance, during the year 2021, Latvia, Slovakia and Italy spent less than 20% of their ETS revenue on climate action, while Austria and The Netherlands spent zero, the study shows.
Moreover, the quality of member states’ reports is considered poor, and the data provided “not robust”, while the European Commission fails to report these inaccuracies, according to the authors of the study.
There is also little scrutiny of the ‘climate action’ spending by EU member states, which leads to misleading reporting. France, for example, reports over €1 billion in 2021 as ‘climate action spending’ when this amount was in reality transferred to the French general budget, the study shows.
“This analysis shows that for the last decade, the ETS was based on a ‘polluters-don’t-pay principle’ – with billions and billions of forgone revenue that EU countries could instead have invested in industrial decarbonisation,” said Romain Laugier from the WWF’s European Office and lead author of the report.
“EU negotiators should phase out free allowances as soon as possible, and in the meantime make sure companies that receive them meet strict conditions on cutting their emissions,” he added, underlining that EU member states should be required to spend 100% of the ETS revenues on climate action.
[Edited by Frédéric Simon]
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