A potential €54bn of revenues were "lost or forgone" in the EU’s carbon market in the 2013-19 period because of the free allocation of carbon allowances, according to new analysis from WWF.
While member states raised €49bn in revenues through the EU Emissions Trading System (ETS) over the same period, the total figure would theoretically have more than doubled if companies in some industries covered by the scheme had not received free allowances, WWF said today.
Auctioning is the main way of allocation emissions allowances to companies covered by the EU ETS, but some sectors outside power generation where “the transition is taking place progressively”, according to the Commission, receive a portion of free allowances. For example, the manufacturing sector received around 30% of allowances for free in 2020 and airlines have received a large majority of their allowances for free in the 2013-20 period.
The WWF research comes amid reports that the European Commission plans to include shipping in the EU ETS, and create an emissions-trading programme for housing and transport, as part of updates to be announced next month.
Responding to the reports, an EU spokesperson told RI: “As President von der Leyen said: “Carbon must have its price – because nature cannot pay the price any longer.”
“We are currently preparing the Fit for 55 Package of legislation which will be presented on the 14th of July, and will include our concrete proposals,” the spokesperson added. “As part of this work, the Commission is carefully assessing the possibility and modalities of reinforcing and expanding emissions trading as a tool to achieve greenhouse gas emissions reductions and reach our ambitious 2030 emissions reduction targets. Work is ongoing and we cannot comment further on the detailed contents or leaks.”
In response to the reports, Sofie Defour, climate manager at NGO Transport & Environment, told RI: "There is a role for carbon pricing but the heavy lifting needs to come from things like emissions-free cars, rapid electrification and building up a world-class charging network. That can be delivered by increased national climate targets, stringent pollution limits for cars and buildings and a carbon price that brings people on board by starting slow and giving back money.”
The Commission may reportedly introduce a phase-in period for shipping companies in the trading system between 2023 and 2025, and establish a new ETS for housing and transport for 2025.
Including shipping, along with international aviation, in the EU ETS is one key recommendation from WWF as part of its report released today outlining flaws in the current EU ETS system.
The WWF calls for free allowances to end and also criticises the fact that of the €49bn Europe raised in revenues through carbon markets from 2013-2019, €13.3bn was not spent on climate action, according to member states’ reporting. WWF recommends that member states should have to earmark EU ETS revenues for climate action.
It also recommends that revenues raised by a Carbon Border Adjustment Measure (CBAM) should be returned to developing countries in the form of international climate finance.
The EU is currently looking at CBAM as a tool to protect its heavy industries from unfair ‘carbon competitiveness’ as EU carbon prices rise and free allowances run down.
The EU carbon price has hit all-time highs this year, and for observers it is vital to make sure carbon markets truly work in making polluters pay adequately for emissions.
But, heavy-emitting companies in Europe, also risk being put at a competitive disadvantage compared to their global peers that do not have to pay as high a price in their jurisdiction.
CBAM, effectively, is a charge to foreign products imported to the EU reflecting their carbon intensity.
Frans Timmermans, Executive Vice-President, European Commission, said in January: “It’s a matter of survival of our industry. So if others will not move in the same direction, we will have to protect the European Union against distortion of competition and against the risk of carbon leakage.”
Other major economies however, such as the US and China, have in the past been cautious on the use of CBAM.
In related news, the UK Climate Change Committee has made a number of recommendations to improve the UK’s recently-launched ETS scheme, which opened at a price of £50 per tonne last month.
Recommendations include setting out a cap for the UK ETS consistent with a credible path to the Sixth Carbon Budget for consultation this year.