Look closely enough at yesterday’s European Commission communication on ‘moving beyond a 20 percent greenhouse gas reduction’ and you will spot a scandal. It’s on page 3 and it reads like this: ‘With many allowances unused during the crisis, companies will be able to carry over some 5-8% of their allowances from the 2008-2012 period into the third phase of the ETS.’
What this means is that during the 2008-2012 period of the EU emissions trading system, companies were given more carbon allowances — pollution permits — than they needed. Partly this is a consequence of unforeseen events. Because of the deep recession, big steel firms and the like drastically cut their production between 2008 and 2009, emitting much less CO2 than expected, and so ending up with piles of unused emission allowances.
But partly, the allowance surpluses are down to bad planning, lobbying and the rewarding by governments of their favourite industries (ie those that threatened to relocate elsewhere if they did not get bumper carbon allowance handouts).
Because of the way the ETS was set up, the surpluses are held primarily by heavy industry, rather than by power plants. Here are a few examples. In Belgium, in 2008, ArcelorMittal received for its various plants 11,183,005 allowances. But it only used up 7,109,899 of them — a surplus of more than 4 million.
Another metal-basher, Corus, received in 2008 across various plants 11,414,550 allowances, but only used 6,953,746 of them. Massive German ironworks Hüttenwerke Krupp Mannesmann, meanwhile, got 8.6 million allowances but only used half of them.
These massive surpluses were: 1). given to these companies for free, and 2). can be carried over to the next phase of the ETS (2013-2020) and sold then. By my admittedly back-of-the-envelope calculations, the 5-8% cited in the Commission’s paper means between 520 million and 833 million surplus allowances EU-wide.
Here is the absolutely scandalous part: the companies holding these allowances can sell them for at least an estimated €16 each in the next phase. That means the most polluting companies in Europe are lining up to receive a windfall that could be as much as €13.3 billion from the ill-conceived emissions trading system.
And who precisely will deliver this windfall to billionaires like Lakshmi Mittal? Well, while EU governments were dishing out massive surpluses to their favourite manufacturers, they gave far smaller allocations to power plants. This was because power plants can’t flounce off to another country if they don’t get what they want. So the massive Drax power plant in northern England, for example, was given in 2008 9.5 million allowances, but had emissions equivalent to 22.3 million — a shortfall of 12.8 million.
But another reason power plants were given insufficient allowances was that they do not suffer any real negative effect from it — they simply pass on the cost to their customers in the form of higher electricity bills. So the ill-conceived ETS has resulted in households across Europe funnelling money into the pockets of some of the continent’s most polluting companies, who have no incentive to do anything in return, but just wait for the free money to roll in.
Increasing the EU’s 2020 emissions reduction target from 20 to 30 percent compared to 1990 levels would force a quicker burn through of the surplus but will not reduce the windfall. In fact, it might increase it, because the carbon price would likely rise. However, the Commission should scrap the rule that allows the 2008-2012 surplus to be carried forward to the next ETS phase. Of course in the face of the lobbying power of the steel industry and others, this is hardly likely to happen.