Final deal on EU carbon market (ETS) gives heavy industry a free pass at the expense of households and taxpayers

The long process that was meant to transform the EU’s Emissions Trading System into an effective tool for climate action has culminated in a final deal that will not reduce Europe’s industrial carbon footprint rapidly enough to tackle the climate crisis. The reformed EU ETS lavishes freebies on polluting industries and leaves households and taxpayers with the bill.

Since the summer of 2021, the European Union’s institutions have been working on revamping the EU’s Emissions Trading System to make it ‘Fit for 55’. However, the final outcome of this process is unfit to contribute towards the EU’s goal of reducing its overall emissions by at least 55% by 2030, and way off the mark for what is required to keep temperature rises within the relatively safe zone of 1.5°C.

“Fearing the bogeyman of Europe’s alleged future deindustrialisation, policymakers have continued their misguided approach of letting heavy industry off the hook,” said Sabine Frank, executive director of Carbon Market Watch. “Now that the ETS falls short of what’s required to tackle the climate emergency, other policy instruments will have to step in to do the job.”

Although the EU ETS was the first such scheme in the world, it has so far succeeded in bringing down emissions in the power sector but failed to deliver any meaningful reductions in industrial emissions from such sectors as steel, cement and chemicals. One of the main reasons for this failure has been the billions of free pollution permits given to energy-intensive industries under the scheme – an error policymakers have repeated once again.

“The EU ETS will soon be 20 years old and has undergone a dozen legislative reviews. Sadly, even after this long-awaited reform, Europe’s carbon market will fail to deliver adequate emission reductions and it won’t ensure that the polluters pay. EU policymakers clearly have a lot of homework left to do,” said Sam Van den plas, policy director at Carbon Market Watch.

Freebies galore

The EU has set the industries covered by the EU ETS the target of reducing their emissions by 62% by 2030, which is way below the 70% required for Europe’s power and industry sectors to contribute fair share to keep global heating in check. But beneath the surface, the EU’s climate goals are being actively undermined by massive exemptions to large polluting industries, which have enshrined a deeply unfair and ultimately ineffective system where only small polluters have to pay, while large polluters can continue to emit with impunity.

When it comes to the application of the polluter pays principle, the ETS reform misses the mark completely. Industries are required to slash their emissions more than in the past decade but are again given virtually zero incentives to do so, which is setting up the scheme to fail. This is because policymakers keep showering heavy industries with free pollution permits, to the tune of over €400 billion. This is a practice that has clearly failed to trigger cuts in emissions in the past, as evidenced by data. Perpetuating such counterproductive practices is ill conceived.

Reform leakage

The continued existence of free allowances threatens the effectiveness of a new policy instrument that is meant to combat the risk of so-called carbon leakage (i.e. the relocation of polluting industries to areas with lax environmental laws), the Carbon Border Adjustment Mechanism (CBAM).

However, under immense pressure from industry, EU policymakers put in place a diluted version of the CBAM which has rendered it toothless and ineffective. This reform fails to put in place a meaningful levy at the border because the pace at which the free pollution permits, which must be discounted from the carbon levy charged on imports, are reduced is beyond glacial, leaving more than half of them to be phased out after 2030. This means that the CBAM will only fully kick in a dozen years from now, in 2035.

“It’s unfortunate to see policymakers fail to fully understand the value of CBAM. Had they had the courage to actually implement a meaningful levy, this would have had the potential to significantly contribute to reducing emissions in Europe and beyond,” explained Agnese Ruggiero, CMW’s lead on the EU carbon market and industrial decarbonisation “This reform leaves will give heavy industry so many freebies that it will, drastically weaken the carbon price signal to energy intensive sectors.“

Wider reach

The reformed Emissions Trading System also covers more sectors than before (including shipping, road transport and buildings) and compels governments to spend all the revenues from the carbon market on climate action, which is a significant improvement on the 50% member states were advised to allocate to climate action previously.

Unfortunately, EU governments were not able to let go of fossil fuels entirely and agreed to carve out a space for fossil gas in the fund that is meant to modernise the power sector, the so-called Modernisation Fund.

Funding for the new Innovation Fund was also increased. However, the slow phasing out of free pollution permits will result in lower revenues for this fund, undermining the EU’s capacity to innovate and to roll out clean energy solutions. “This is a massive missed opportunity for co-legislators who prefer subsidising incumbent industries instead of supporting clean innovative ones,” laments Ruggiero.

Redrawing the battle lines

Now that the European Union has failed to properly revamp and reform its key instrument for industrial decarbonisation, other policies will have to pick up the slack, if the EU is to accomplish its climate goals for the good of the planet and society.

“It is clear that the required industrial decarbonisation will not and cannot be delivered by the EU ETS alone. We therefore call for the urgent inclusion of binding and strict greenhouse gas emission limits within the scope of the Industrial Emissions Directive,” urges Sabine Frank.