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People and climate pay as companies pollute for free

Posted on 26 November 2021

Have you ever lost any money? Through crime, bad luck, or simple absent-mindedness?

When you realise what’s happened it feels infuriating and sickening.

Imagine now that you deliberately allowed vast amounts to be lost to you every day - and worse still, that it was being spent in ways that harmed your health.

This is what is happening with the EU Emissions Trading System (ETS), which is currently being reviewed and revised by the EU.

The ETS requires certain industries to buy and sell certificates on the market in order to emit carbon. The money raised goes back to EU Member States. It came to €49 billion from 2013 to 2019, WWF calculated.

Yet Member States are deliberately depriving themselves of billions more ETS Euros. And of the money they do get, they are allowing much of it to be spent in ways that do more harm than good to the climate.

The reason for Member States’ lost billions is because certain sectors, like energy-intensive industries, are given many emissions allowances for free. This is supposed to protect those sectors from competition from outside the EU.

In reality, it means those sectors can carry on harming the climate, without having to do much in the way of cutting emissions.

These ‘foregone’ revenues came to €54 billion from 2013 to 2019 - more than the €49 billion that actually was raised. This phantom money, given as windfall profits to polluters, could have been spent by governments on helping the climate.

It is essential that free allocations are phased out by the end of 2023 and replaced by auctioning. As free allocations are phased out, the EU’s planned levy on imports of certain goods - the Carbon Border Adjustment Mechanism - can be phased in. This will support EU industry and jobs against competition from regions with less strict rules on climate.

Clearly, ending free allocation of allowances will not only reduce pollution, it will also bring more potential cash for the climate. As the ETS is revised, the European Commission’s proposal that all revenues from the ETS help finance the transition to climate neutrality must be maintained.

What’s more, of that €49 billion, €13.3 billion - 27% - was not spent on ‘climate action’, according to Member States’ reporting.

And yet even what can be termed 'climate action' in ETS reporting allows for an awful lot of fudge and greenwashing, WWF found. Some of the money EU governments claimed went on climate-compatible activities from 2013 to 2019 actually went towards counterproductive ones such as oil boilers and gas powered convectors. For example in 2019 Germany spent €218.6 million or 7% of its ETS revenues on electricity-intensive companies, while officially reporting it as ‘climate’ spending.

The European Commission needs to build a clear definition of what qualifies as ‘climate spending’ under the ETS. This should exclude upgrades to fossil fuel plants, Carbon Capture and Storage, gas power stations, and subsidies to electricity from fossil fuels - all of which can currently be put in the ‘climate’ category.

The Commission must also be much stricter on how countries report on their spending.

Right now, Member States do not have to single out ETS revenue spending in their national budgets. Only four of them - Croatia, Czechia, Italy and Spain - have done so. This means that others can in theory claim they are spending the revenues on climate, while really using existing budgets.

In some cases, this blurred situation has even led to countries, like Slovenia, Cyprus and Lithuania, reporting climate spending that exceeds their total revenues from the ETS.

It is also crucial to ensure the ETS does not unfairly impact people or regions. Putting transport and buildings under the ETS risks hurting the poorest people and causing energy and fuel poverty. While transport and buildings must be decarbonised, this should be done in a way that does not penalise ordinary people. ETS revenues should also go to supporting the social side of climate action.

With the climate crisis getting more acute, and time running out to tackle it, it is crucial to tie up these loopholes. Doing so would boost zero carbon technologies and so help create sustainable solutions and jobs, as well as being a big step in Europe’s contribution to the fight against climate change.

The EU Emissions Trading System is full of holes. The EU must fix it.

WWF report: Flawed EU carbon market losing EUR billions for climate action (June 2021)