THE FIX FOR EU EMISSIONS TRADING

EU Urged to Claw Back Surplus Carbon Trading Permits; Companies Stockpiling Valuable Permits Could Avoid Future Emissions Cuts
Ann Danylkiw, April 2, 2010 (Solve Climate)

"…[T]he EU Emissions Trading System must [soon] finalize the sectors that will receive exemptions meant to avoid carbon leakage for Phase III of the EU ETS…European industry has been lobbying hard to increase the number of free, sectoral allocations. But [The Carbon Rich List: The companies profiting from the EU Emissions Trading Scheme] by the NGO Sandbag shows that despite the political pressure to grant “sweeping exemptions” to steel, aluminum, cement, iron and energy industries, in Germany and France in particular, almost no new allowances will actually be needed…

"Carbon “leakage” is the term used to describe industry relocation for competitive purposes. European industries claim that without free allowances they will be forced to sacrifice jobs in manufacturing and generation facilities located in the EU or ultimately relocate to other regions because they will not be able to compete with cheaper manufacturing sources in emerging market countries…[Sandbag says that] is an exaggeration, noting that goods produced for consumption within the EU would have to be shipped farther if production moved overseas, adding cost and making the process more carbon intensive anyway."

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"There’s also the issue of companies receiving free allowances, deciding to cut European jobs anyway, and pocketing the value of those allowances….[T]he UK steel maker Corus closed a plant…putting 1,700 employees out of work, but the company retained the plant’s carbon permits. Corus, according to Sandbag’s report, now has €377,520,882 worth of surplus carbon permits that it can resell…[A]llowance surpluses from the previous phases of the EU ETS could be used to offset 50 percent of EU required emissions cuts in Phase III…[Some companies could meet all of their required cuts for Phase II without making any emissions cuts]…EU ETS [numbers] bear that out. Amid last year's economic downturn, ETS-covered CO2 emissions dropped by 11 percent, but the cap didn't change…[S]urplus permits in circulation rose from 62 million to 142 million…[C]ompanies can sell or use [them] in the future rather than cut their emissions…

"Under an EU plan, 164 sectors — comprising 77% of total EU emissions — would be eligible for free allowances in the long term to avoid carbon leakage…The EU is also considering allowing carbon offsets to be purchased from other regional or national schemes, which would increase the overall supply of offsets…[drving prices] further down…[S]ome companies may have legitimate complaints about carbon leakage, [but] they are small in number."

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"The report explains that so many permits held in surplus means that some companies stand to make windfall profits in the future from companies that have too few permits. A small number of companies in the iron, steel, and energy sectors will be required to bear responsibility for overall EU emissions cuts for the sector because others that are flush with credits won’t have to change how they operate. If the costs are substantial, the result could be a competitive disadvantage…

"[Sandbag] suggests that the EU find some way to claw back the surplus permits before going forward with Phase III…The best solution, though, is to tighten the overall caps and auction the permits rather than give them out as free allowances…The only way to fully eliminate leakage…is a global carbon trading system, and that is a long way off. It would have to include emerging markets, and trading would have to be completely integrated and sufficiently regulated. While the Japanese and South Koreans will have trading systems shortly, the U.S. seems to have stalled, and India and China aren’t anywhere near setting up schemes…"