Heavily-polluting industries are in line for a €5bn (£4bn) handout from Europe’s taxpayers because of the way the EU is measuring their exposure to unregulated competitors outside the bloc, according to an unpublished report prepared for the European commission.

Steel-making, cement and power plants have their greenhouse gas emissions capped by the emissions trading system (ETS), putting a price on carbon to encourage companies to cut emissions by trading allowances.



The EU calculated the risk of such companies relocating to regions with laxer emissions limits – known as ‘carbon leakage’ – by assuming carbon allowances will be at €30 a tonne up to 2020. But carbon allowances have not touched that price since 2008, when the ETS was set up, and currently languish at around €6 a tonne, due to economic crisis and a market glut.

Using a lower price of €16.50 a tonne – the working paper’s preferred option – would “increase the auctioning revenues for member states by about €5.01 bn”, the document predicts.

The lower price would also cut the number of free pollution permits to industry by around a quarter, and address a carbon market already flooded with around a billion spare allowances. Some 640 million of these, with a value of almost €2bn, are owned by high-emitting sectors such as cement and steel.

“The costs of too many sectors on the carbon leakage list and thus too high free allocation is that public resources are wasted,” says the report which will be published later this autumn, if the list is first approved in a European parliament vote on 24 September.

“The commission has proposed another carte blanche to energy-intensive industry worth €5bn of taxpayers money,” said Eva Filzmoser, the director of Carbon Market Watch. “It is now up to the European parliament to reject the proposed carbon leakage list and make polluters pay, as recommended by the commission’s own scientific experts.”

Isaac Valero, a spokesman for the outgoing climate action commissioner, Connie Hedegaard, told the Guardian that the €30 a tonne price had been chosen because the EU’s proposed 2030 climate and energy targets and market stability reserve for the ETS would give carbon prices a boost.

“Under those circumstances, it is expected that the carbon price will in the future be more strongly driven by mid- and long-term emission reductions,” he said. “It is therefore considered justified to continue using an assumed carbon price of €30 per tonne of CO2 equivalent for the assessment underlying this decision.”

But even factoring in 2030 targets and the proposed allowance reserve, market analysts Thomson Reuters Point Carbon told the Guardian they expected a carbon price of €10 a tonne by 2020.

Marcus Ferdinand, Point Carbon’s head of EU carbon analysis viewed the €30 figure as “very much at the high end” of market forecasts. “I think it is more a means to reassure industrial participants in this market,” he said.

Indeed, an alliance of energy intensive industries sent a letter to EU governments and institutions last week urging a rapid commitment to continue the policy of free allowances for heavy industry beyond 2020. “Energy intensive industries are all at risk of carbon and investment leakage and therefore must be safeguarded,” their missive said, calling for the guaranteed 100% free allocation of pollution permits with more business-friendly criteria in the decade ahead.

Under the EU’s current proposals, 175 industry sectors out of 245 will receive their pollution permits for free to 2020, even though the ‘carbon leakage’ phenomena is still disputed, with one recent EU report questioning whether it even existed.

“We found no evidence for any carbon leakage – according to the ETS directive, defined as production relocation due to the ETS – in the past two ETS periods,” they said.

Some environmentalists argue that an approach to cutting emissions centred on the carbon market allows industry groups to block more easily verifiable CO2-cutting measures, like energy savings.

“The biggest opponents to energy efficiency are the people in the commission who support an ETS-only policy for 2030,” said Brook Riley, a spokesman for Friends of the Earth. “They want to block ambitious 2030 targets for energy efficiency and renewables to protect their ailing brainchild [the ETS].”

Riley cited an internal EU document, obtained by WWF and Friends of the Earth in an access to documents request, indicating that the costs of a higher energy efficiency target could be dramatically lower than those published in an efficiency review this summer.

The price tag on a 30% energy efficiency target fell by €600bn when EU models included the climate, health and market benefits of using less energy, and assumed that the policy was actually implemented by EU states.