Financial Times - A carbon giveaway Europe cannot afford
http://www.ft.com/cms/s/0/cfdb84f2-77e8-11df-82c3-00144feabdc0.html
By Michael Grubb and Susanne Droege
Published: June 14 2010 22:49 | Last updated: June 14 2010 22:49
What links the Greek bail-out with climate change? Quite a lot, actually. Debt and climate change both build up over long periods during which policy is dominated by lobbying and short-term political expediency, until a day of reckoning. But the link is now much more direct and powerful, and offers an opportunity as big as the challenge. The question is whether Europe has the capacity to seize it.
The emergency deal to support the eurozone has underlined the continent’s staggering levels of debt. Yet this week’s European Council meeting seems set to condone proposals to give away tens of billions of euros in free emission allowances to companies operating under the European Union’s emissions trading system, which sets a price on carbon. In many instances, the result will be big profits for the most energy-intensive sectors, at the expense of the rest of EU business. European governments need to wake up before final decisions are taken later this year.
Economists have long pointed out that granting free emission allowances could generate windfall profits, because in many markets the carbon price may still be passed on and added to the product price. This was the case for the EU power-generating companies that reaped many billions of euros out of the EU ETS in its early years. For this sector, therefore, the EU has seen sense, and in the next phase of the scheme – starting in 2013 – almost all allowances to power generators will be auctioned.
However, Europe’s energy-intensive industries – cement, aluminium and steel – have argued that they are different. Being exposed to international trade, they say they might move abroad to avoid carbon costs. In December 2009, Europe agreed an implausibly long list of “sectors at risk” of such carbon leakage, and will decide what to do about them this year. The official proposal to emerge, after years of intense lobbying, is to give them free emission allowances until at least 2020 and quite possibly for years beyond that.
There are several problems with this response. Giving out free allowances protects the most carbon-intensive activities and undermines incentives for cleaner production. With a given emissions target, the rest of business would need to cut emissions further to compensate, which raises the carbon price. In the next phase of the EU ETS, meeting the EU’s current ambition while protecting the big emitters of cement, steel and aluminium industries in this way could add up to 30 per cent to the carbon price faced by the rest of EU business.
As Europe’s emission cap tightens, the volume of free allowances will decline, and this underlines the poverty of relying on this approach. Industry argues that proposals to tighten Europe’s unilateral emissions target to 30 per cent will leave insufficient free allowances – so that they would need additional policy protection anyway.
Current proposals for free allocation ignore better approaches in key sectors. Instead of levelling down the costs for producers in the EU ETS with free allocation, carbon costs can be levelled at the border by requiring importers to buy emission allowances too. For relatively simple commodities such as cement – which on its own emits far more for example than aviation – this can be done relatively easily with a fixed-rate charge. This approach makes it clearly compatible with the World Trade Organisation, much like petroleum excise duties, where no one suggests importers should be exempted.
The environmental benefits of making producers pay for their emissions go hand-in-hand with the fiscal benefits of doing it properly – to the tune of tens of billions of euros over the next decade. Continuing the cement example, Greece, Italy and Spain are among Europe’s largest producers, consumers and importers. They have most to gain from pricing carbon properly in this and other sectors, while being protected from unfair exemptions for importers.
And while the EU struggles to meet its domestic finance gap, the industrialised countries also made commitments at Copenhagen on international funding. In addition to the benefits of offering a long-term solution based on a move to auctioning domestically, requiring carbon-intensive traded goods to buy allowances could be a natural source of such international revenues – offering a key source of the “new and additional” finance for which UN negotiators are desperately searching.
So, take your choice. At a time of fiscal desperation, European governments can give away tens of billions of euros, in ways that may largely be reaped as windfall profits by polluting industries, and in so doing increase the cost to the rest of EU business of meeting our climate commitments. Or they can charge carbon properly, creating clear and consistent incentives to cut emissions efficiently, and thereby raise tens of billions for the public purse, with a portion of the new revenues associated with imports potentially available to crack the international impasse.
Guess which option the European Council is expected to endorse?
Professor Michael Grubb is chair of the international research organisation Climate Strategies at Cambridge university. Dr Susanne Droege is head of the global issues division at the German Institute of International Affairs (SWP), Berlin
