The EU Emissions Trading System: Time to end free pollution permits for big polluters

Europe is in the midst of a massive transformation. Tackling the climate crisis as part of a number of other environmental, health and social crises, requires us to rethink, reinvent and redesign together how we live, what we produce and consume.

Russia’s  invasion of Ukraine has yet again exposed how unhealthy our relationship to energy has remained even 25 years after the UNFCCC was agreed, and it has added further pressure to speed up the pace of this transition. But it has not altered the direction of travel. The EU now needs to accelerate the shift towards clean energy and sustainable ways of living, ending its addiction to fossil fuels and harnessing innovation to prevent pollution and other negative impacts at source. This requires a reorientation of existing rules governing all sectoral emissions and removing systemic barriers that hinder the swift transition needed.

A particularly notorious barrier are current rules under the EU Emissions Trading System (ETS) that hand out free pollution permits to industry through “free allowances”. The ETS requires companies in the power, industry and aviation sectors to buy allowances for every tonne of their greenhouse gas emissions. However, the vast majority of industry gets a free ticket solely based on the claim that paying for their pollution would make them less competitive than non-EU competitors and so force them to relocate outside the EU to countries with weaker climate policies.

On 20 April, members of the European Parliament’s Industry committee (ITRE) will vote on their opinion for the revision of the EU ETS, in particular on whether to phase-out free allowances. Civil society organisations are calling on them to make a difference, as things are looking worryingly bad.

Here is why ITRE’s opinion document needs to call clearly for free allowance phase-out:

This system of continued, untargeted and overgenerous handout of free allowances to industry has contributed to the fact that while the EU carbon market has been relatively successful in driving down emissions in the power sector, industrial emission levels and final energy consumption have mainly stagnated for the past 20 years.1 It is estimated that under current rules around 94% of industrial emissions will remain eligible for free allowances until 2030. This lack of action and the detrimental impact of the current free allowances regime has been criticised for many years, including in a 2020 special report from the European Court of Auditors.

Handouts of free pollution permits slow down the necessary transformation of industry, severely undermine the polluter pays principle and cause severe distortions to sustainable investments by muting the carbon price signal. This substantially weakens the financial incentive to invest in cleaner production.

Equally importantly, they also conflict with the imperative of social justice in Europe’s economic and societal transition, as industry does not pay for its pollution so public authorities cannot fund crucial societal services.

Without an effective carbon price, the wider social costs of pollution caused by industrial emissions fall back on citizens, rather than on polluters. The European Environment Agency estimates the costs of industry’s air pollution at between EUR 277 billion and EUR 432 billion in 2017, with greenhouse gases representing between 71% and 45% of these costs (at EUR 197 billion).2 Another estimate put profits for sectors like cement, iron and steel through the current ETS design at EUR 50 billion between 2008 and 2019.3

After more than a decade of austerity, this revision of the EU ETS should lead to more responsible public spending. At a time when European industry needs to transform towards climate neutrality, circularity and zero pollution, every allowance given out to polluters for free is lost public revenues and investments that could have gone to supporting just transition plans for affected communities, worker reskilling programmes, scaling up existing cleaner technologies, investing into energy efficiency, rolling out renewable energy or making industrial processes more circular.

It is high time to steer the wheel in a fairer direction.

And there is a unique opportunity ahead. The EU carbon market is currently under review as part of the Fit For 55 legislative package. EU policy makers now have a chance to make sure that the system is made fit for purpose and that public resources are not used to keep fossil-based and polluting production alive and protected, that European industry receives true and effective incentives to swiftly reduce emissions and transform its production processes.

Making sure that polluters pick up the bill for the damage they cause to the environment and people is a fundamental principle of EU policy. It is now in the hands of the European Parliament and the Council to defend this principle and ensure that the European Green Deal does not shift the burden away from big polluters, but provides for the socially just transformation we need.

European Court of Auditors, special report (2020). The EU’s Emissions Trading System: free allocation of allowances needed better targeting.

2 European Environmental Agency, briefing. (2021). Counting the costs of industrial decarbonisation.

Carbon Market Watch (2021), briefing. The Phantom Leakage – Industry windfall profits from Europe’s carbon market 2008- 2019.

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Public Statement: A Social and Green Investment Plan for a prosperous and just transition

As organisations committed to tackling the multifaceted crises of our times – from climate change and biodiversity loss to the cost of living and energy independence – we call for a €1 trillion investment plan for people and the planet to be at the top of the agenda for future EU leadership. These challenges are largely an investment challenge, and EU funding is more needed than ever to mobilise and boost public and private financing of Europe’s resilience and competitive sustainability. Political parties’ manifestos all recognise this need. Now is the time to meet citizens’ expectations of a better future, invest in the transformation of our economy, and make good on the promises of the Green Deal. This statement presents our proposal for a Social and Green Investment Plan that would achieve these aims.

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