(Updates throughout)

EU environment ministers focused on how to best protect their heavy industries by giving them free carbon allowances on Monday, giving scant attention to an idea to earmark ETS cash for poorer nations.

The ministers gave an initial response to post-2020 ETS reform proposals at an EU Environment Council meeting in Luxembourg, with the UK, France and the Visegrad+2 group of six eastern states coming up with the most detailed responses.

Many ministers said they were yet to reach a firm position on the proposal, adding weight to expectations that its passage into law would be lengthy and would likely be agreed by the end of 2016 at the earliest.

The UK received signs of support from several member states – including France and the Visegrad+2 – for its plan to tier industry’s allocation of free allowances to more than two levels, depending on the risk of carbon leakage.

The Commission proposes just two free allocation options, with some getting 100% of required EUAs up to an industry benchmark, and all others 30%.

WEST-EAST DIFFERENCES

France and the UK differed from the Visegrad+2 on whether the proposal should keep the proposed overall 43% share of EUAs for free allocations or seek to boost the handouts.

France called for free EUA allocations for industry sectors less exposed to carbon leakage to drop to zero by 2027. This is in line with current EU ETS law, while the post-2020 proposal envisages at least 30% of free allocation for all industries through 2030.

France also suggested that a more targeted approach to free allocation would leave spare units left over that could be added to the pot of 400 million allowances that are due to be sold under the Innovation Fund for low-carbon industrial projects.

“We must not undo our recent progress and ensure unallocated allowances in the MSR are allowed to drift back (into the market) prematurely,” said the UK’s Rory Stewart, referring to a provision in the recently agreed MSR rules that potentially allow units in the reserve to be given freely to carbon leakage-affected industry.

In contrast, the Visegrad+2 are seeking to make use of the provision.

“It remains to be seen if free allocation is enough to protect our industries,” said Marcin Korolec of Poland, a Visegrad+2 member along with the Czech Republic, Hungary, Slovakia and Bulgaria and Romania.

Belgium went even further, suggesting that the share of allowances to be handed out for free, at 43% in the current proposal, be raised by reducing the share of units to be auctioned from 57%.

VISEGRAD POSITION

The Visegrad+2 group jointly agreed their own initial position on the ETS proposal, which expressed “regret that the assessment of the proposal’s impact is not sufficiently substantiated in line with competitiveness proofing standards”.

The joint position also asked that numerical thresholds for the carbon leakage list be examined further “in order to better reflect the real risk among individual sectors,” according to a statement seen by Carbon Pulse.

They said the proposed free allocation method and annual reduction of the benchmarks, used to determine the amount of allowances allocated to each industrial sector, be based on a recent assessment of technological progress.

“In this context, we consider that it would be useful to further explore the possibility of dynamic allocation in order to aligning the free allocation with changing production levels,” they said.

The Netherlands also expressed support for dynamic allocation.

The Commission proposal calls for a fixed list of companies entitled to carbon leakage protection over the full 2021-2030 period, and for free allocation to be decided for five years at a time, according to revised benchmarks in each period. It ruled out dynamic allocation because it would put too much of an administrative burden on governments.

CLIMATE FINANCE

The ministers paid relatively less attention to the issue of whether to ringfence some of the revenue to be raised from auctioning post-2020 EUAs for foreign climate aid, but they appeared divided on the issue.

The UK reiterated its longstanding view that it should be up to member states to decide how they spend EU ETS revenues, rebuffing a motion by the EU Parliament to ringfence a portion of the revenue to guarantee climate finance to poorer nations.

Latvia and Poland both said that the auction revenues should be used for national measures and not tied to aid spending.

But France, host of the December UN climate talks and working hard for a global deal, said it disagreed with the UK’s position on the auction proceeds and wanted a stronger link to the Paris process.

Luxembourg’s Carole Dieschbourg agreed, saying “I would have preferred a more binding wording about the use of funding”.

Slovenia pointed out that in 2016 it would for the first time earmark some of its auction revenue towards climate finance. Belgium said hypothecating would provide a more stable revenue stream than the current voluntary national approach, but said this shouldn’t be the bloc’s only source of climate finance.

Lies Craeynest of development charity Oxfam said the remarks from the four nations offered “a glimmer of hope” to the prospects for ringfencing.

Oxfam sees the earmarked EUA cash as a relatively secure way for the bloc to assure developing nations that the EU is making good on its international climate finance commitments.

But the issue has struggled to gain traction because while much of the bloc’s climate change policy is decided at EU level, spending is largely determined by member states, according to EU treaties.

EU finance ministers meet on Nov. 8 to finalise the bloc’s position on climate finance ahead of Paris. It remains possible the issue could be raised by EU environment ministers during the Paris talks as a potential bargaining chip to win over poorer nations.

OFFSET USE

Meanwhile, Portugal was the only country to refer to “flexibility” in terms of carbon offset use.

The ETS proposal and the EU leaders’ deal on which is based don’t allow for the use of additional international credits in the ETS, but the leaders did raise the possibility that domestic offsets from non-ETS sectors could be explored.

“Portugal is in favour of options like the CDM, but at a European scale. We need to have clear common rules at EU level so allowances can be used for ETS and non-ETS work,” said Portugal’s envoy Rosa Batoreu.

The European Commission is due to publish its post-2020 proposals for non-ETS sectors in the first half of 2016.

By Ben Garside – ben@carbon-pulse.com