EU politicians, academics, and speakers on behalf of industry, civil society and labour unions came together, on 25 January 2022, to discuss the role of the EU’s Emissions Trading System in combating the climate crisis. The European Commission aims to achieve a 55% reduction in greenhouse gas emissions by 2030, and net-zero emissions by 2050. But can the EU ETS contribute its share of this goal? And how can the ETS ensure a just transition for society and the climate?
In an online conference, facilitated by TV personality Talitha Muusse, speakers debated a variety of contentious topics related to the EU’s Emissions Trading System, such as its overall climate ambitions and targets, free allocation of emissions allowances for industry, the social implications of the ETS and much more.
Study stirs debate
Pieter-Willem Lemmens, Climate consultant at ClimACT presented their simulation model, which assessed the impact of the Europeans Commission’s proposal on ETS on the supply and demand for ETS emission rights, the free allocation levels and the impact on auctioning volumes.
The model predicted that, despite a tighter emission cap, the surplus of allowances on the market could start to increase again after 2025. This could bring the EU’s overall target to reduce emissions by 55% at risk. Lemmens suggested three solutions to lower the cap: reducing the Market Stability Reserve (MSR) threshold in line with the cap, a stronger one-off reduction of the cap, or a combination of both.
A lively discussion followed, as Former Director-General at the European Commission’s Action DG Jos Delbeke and MEP Peter Liese, the European Parliament’s rapporteur for the revision of the EU ETS, disagreed that the stronger targets were necessary and warned that this, in his view, was politically unrealistic. “What we need is a realistic proposal,” Liese claimed. “It is important to avoid carbon leakage and to push the world in the same direction. Therefore, I didn’t propose a change to the ambition level.”
Sabine Frank, the executive director of Carbon Market Watch, responded that the CLIMACT study showed we do need greater ambition: “We should not fear the political consequences before we have discussed what is necessary for the climate.”
On a more positive note, the model showed that revenues, in particular for the Modernisation Fund and the Innovation Fund, would increase as a result of the Commission’s proposal. “The innovation and the modernisation funds are going to be important drivers, for two reasons, more allowances are going to these funds, and they will be worth more, so that’s a welcome development,” explained Delbeke.
Free allocations and carbon leakage
The panelists also shared their views on free allocation and carbon leakage. Peter Liese expressed his view that we need to be careful and ensure that the decarbonisation of Europe does not lead to the de-industrialisation of Europe. “Without carbon protection, we may create a disaster.” He said that market predictability and rewarding the best performers was important.
Jos Delbeke mentioned that free pollution permits are currently overly generous, including occasional overcompensation, and that we therefore should rethink the free allocation system: “How can we accelerate the transition towards a much lower carbon economy?” Sabine Frank also suggested that the ETS can be the answer to ensure the competitiveness of European industries, by supporting industry to modernise and decarbonise. “Free allowances are foregone revenues, we need the revenues to make a decarbonized industry in Europe globally competitive.”
Participants mentioned that this is particularly relevant in the debate on carbon pricing. Both Peter Liese and Paul van Dam, the climate attaché of the Netherlands to the EU, mentioned that only a minor portion of the current rising energy price was due to the ETS. In fact, the ETS can actually help the EU to solve the energy dependency issue that we are struggling with by driving the transition towards renewable energy.
Just transition and redistributive justice
The speakers in the second panel touched upon the social and financial impact of the EU ETS, and the different mechanisms and funding schemes that it contains. With a rising CO2 price, the necessity to address social concerns also increases. Who will pay in the end, and at what price? According to Barbara Mariani, climate policy manager at the European Environmental Bureau, it is possible to make up for the lost decade of climate action in a fair way: “There is a huge amount of money, also in the recovery plans. We have the Innovation Fund and the Modernisation Fund to drive industries toward decarbonisation. It’s not about money, it is about how you spend it.”
Julia Michalak of the International Emissions Trading Association also spoke about the modernisation and innovation fund mechanisms that are there to help lower-income member states to decarbonise. However, Ben McWilliams from think tank Bruegel, stressed the need for strengthening the Innovation Fund to enable greater redistributive justice because we “potentially can arrive at the situation where certain member states can decarbonise and are happy with high CO2 prices, sitting in a nice place in 2035 while others are not”.
According to Benjamin Denis, senior policy advisor at IndustriAll, the rising energy prices are a threat to industrial jobs and they are exacerbating inequalities. “A strong and just answer is needed. Carbon price policies are not implemented in a social vacuum. Taxation policies matter, labour law matters. The more precariousness you have on the labour market, the lower the wages and the incomes, the more difficult it will be for the population to accept carbon pricing instruments.”
But should we be pessimistic about people’s opportunities on the labor market? And shouldn’t we be more concerned about the climate, since there are no jobs on a dead planet? It’s both, all the panelists agreed. “In the next 20 to 30 years, most likely, the net effect on jobs is going to be positive,” Denis observed. “It is definitely a challenge, to learn different skills, to move to different places, but the narrative that responding to climate change kills all our job, at least in the medium term, to me does not have merit.”
This event is part of a series of meetings organised within the LIFE ETX project to share knowledge and best practices and discuss carbon pricing policy-making processes among a wide group of stakeholders. This first event is the start of a dialogue between citizens, journalists, policy makers, industry, etc. about the ETS system and how to make emission trading work for the people and the climate.