EU: Who really needs a free carbon permit?

The European Union gives away more free carbon allowances than necessary in response to lobbying by industries seeking to shield themselves from stringent climate-protection policies, according to Vivid Economics.

More than half the U.K. industries receiving free EU carbon permits probably have no real need for the contracts, Robin Smale, director at the consultant in London, said today in a telephone interview. There’s little chance that emissions costs would cause factories to lose business to competitors outside the bloc, he said.

“At the moment, there are people receiving allowances who don’t really need any,” said Smale, who co-authored a report for the U.K. Department of Energy and Climate Change that was published yesterday. “It’s been quite nice having them, but they never needed them in the first place.”

Forcing more companies to buy permits on exchanges would restore their incentive to cut emissions and increase the revenue flowing to governments from the EU carbon market, the world’s biggest, Smale said. The bloc is considering new policies to improve its market after permits slid last year to a five-year low of 2.46 euros ($3.33) a metric ton and as United Nations envoys seek to seal a global climate deal in 2015.

EU carbon permits for December rose 2.6% to €5.54 at 2:18 p.m. on ICE Futures Europe in London. The contracts advanced 12% this year as the 28-nation bloc looked at market-reform plans.
 

Carbon Costs
 

Companies were awarded free permits because in theory they face competition from outside the bloc, according to Smale. For many industries, though, the issue is less serious in reality because carbon costs account for only a small share of total product prices, he said.

A carbon price of €30 a ton in 2020 might wipe out Europe’s cement industry if no free allowances were awarded to makers of the building material, according to yesterday’s report by Vivid and Ecofys International BV. Production by the EU’s milk, sugar and flat-glass industries would be little changed at that price, it showed.

“Way more than half should not get any assistance,” Smale said of industries now receiving free allowances. “That’s how poorly targeted the current arrangements are. There’s been very effective lobbying. It needs to change.”

He didn’t say how many allowances were being given away unnecessarily. The EU awarded €13 billion of surplus allowances to manufacturers in the five years through 2012, data from the bloc show.
 

175 Industries
 

The European Commission, the EU’s executive arm, on May 6 proposed expanding the number of industries in its emissions market that should be protected from relocating to regions without greenhouse-gas curbs. The reviewed measure, which would cover a total of 175 industries from 2015 to 2019, includes areas such as production of dietetic food.

The commission also added manufacturers of non-electric domestic appliances to the list of industries particularly exposed to global competition and liable to move production abroad. The proposal would replace a regulation that protects 164 industries from so-called carbon leakage through 2014.

“I think there are too many sectors on the list,” Jos Delbeke, EU director general for climate, said May 28. “Now it is a bit diluted.”

Copyright 2014 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

Comments
comments powered by Disqus
Check out Futures Magazine - Polls on LockerDome on LockerDome