Amid calls from heavy industry to get more free pollution permits in the name of a ‘fair’ EU carbon market, Europe’s workers, taxpayers, and the climate must not be forgotten in the system’s design reform, writes Femke de Jong.

Femke de Jong is EU policy director at Carbon Market Watch, a pressure group advocating for fair and effective climate protection.

Today, the representatives of EU Member States, the European Parliament and the Commission will sit down for one of the final meetings on how the EU’s flagship climate instrument – the EU Emissions Trading System (EU ETS) – should look like in the 2021-2030 period.

A key issue which remains to be solved is the amount of free emission allowances the different industry sectors will receive in the next trading period to avoid that industries move their production to countries with less stringent policies (‘carbon leakage’).

Provoked by the European Parliament’s big concessions towards the steel industry in the form of additional free allowances, a ‘fair EU ETS’ alliance was set up by industries such as cement, petrochemicals, and refineries earlier this year. These sectors saw themselves losing out as the steel industry would get the lion’s share of the available free pollution permits.

Fairness, the ‘impartial and just treatment or behavior without favouritism or discrimination’, is a concept that applies to the society at large, not just to industry. How fair is the EU ETS to workers, households, innovators and the climate?

There is a risk that the EU ETS revision will be inherently unfair, for the following main reasons.

First, unlike the power sector, industry will not need to buy its emission allowances, but will get them for free on the basis of the yet unproven notion of ‘carbon leakage’. Under the EU ETS revision, free pollution permits worth up to €175 billion would be handed out to industry, with European taxpayers footing the bill as governments lose out on auctioning revenues.

Second, with the current proposals, corporations stand to make a €19 billion windfall from the EU ETS by passing through their non-existent carbon costs on to their customers. Meanwhile, workers and local communities could be left without any financial support to help them in the transition towards a low-carbon society.

Furthermore, under the revision, subsidies for industry pollution will be over ten times higher than support for innovation. There is vast potential for emission reductions in heavy industry that can be realised while enhancing the competitiveness of European companies. However, the proposed over-generous free allocation mostly benefits industry’s biggest polluters while frontrunner companies will receive only limited financial support for their innovations.

Last, but certainly not least, the EU ETS revision is not a fair deal for the climate as emissions will not go down in line with the Paris Agreement goal of limiting global temperature rise to 1.5 degrees Celsius.

Fair and fit for purpose

Making the polluter pay is the original objective of the EU ETS, but it is hardly implemented at the moment. The Parliament and Council even want to reduce the amount of auctioning in the post-2020 period by 5% and 2% respectively compared to the current situation. This would mean that taxpayers stand to lose out on billions of euros in missed auction revenues. Policymakers should ensure that free allocation is as limited as possible.

The EU ETS revision should moreover support workers and local communities that might be adversely affected by climate action in the short term. The European Parliament’s proposal to set up a Just Transition Fund under the EU ETS revision goes in the right direction, although the resources proposed, about €4 billion, are incomparable to the amount that industry shareholders stand to profit from the system.

Support to industry frontrunners should be increased through a larger Innovation Fund after 2020. This would help ensure that the EU ETS creates an economic advantage for innovators rather than polluters. The European Parliament has proposed to increase the size of the fund from 450 to 650 million allowances, equalling around €16 billion. This is a bare minimum to guarantee that European industry does not fall behind its international competitors as the world moves towards a low-carbon future.

The EU has been very vocal in defending the Paris Agreement after President Trump’s announcement on the US withdrawal. It is now time for the decision makers to restore credibility in the system and deliver an ambitious reform that turns Europe’s flagship climate law into an effective tool that helps us reach the Paris goals.