(Updates throughout)

European industries are exploring how they can get a more generous share of free carbon allowances under post-2020 EU ETS reforms, including raiding a pot ring-fenced for auctioning, a round table event heard on Monday.

Manufacturers face escalating costs under Phase 4 of the EU ETS (2021-2030) as the European Commission proposes to hold the share of auctionable allowances at 57% of the total, resulting in an increasingly dwindling share of free units available for industry.

Despite this ratio also being flagged by EU leaders in an overarching deal setting out the bloc’s 2030 climate ambitions last year, industries are already seeking ways to secure more free allowances, several participants at a seminar at the Centre for European Policy Studies (CEPS) said.

Click here for key details on the Comission’s post-2020 ETS reform proposal

The Brussels event featured lobbyists from many of the ETS-regulated industries, along with representatives from the power sector, several national governments, the EU Parliament, environment campaigners and market analysts.

“This 57% number is the hot point. That is going to drag most of the contention we are going to see in the coming months,” said one participant at the event, held under the Chatham House Rule, where the source of shared information is not attributed in an effort to stimulate debate.

One speaker suggested that the historical reason for using the 57% figure was now out-of-date, but while another suggested that the power sector could potentially agree to a lowering of the auctionable share a third said it would be difficult to decide on another figure that everyone could agree on.

Power generators are the main buyers of EUAs at auctions because, with a few exceptions, they get no allowances for free.

The 57% proposed by the Commission continues the share in the current ETS phase and was derived from the share of power sector emissions versus total emissions over 2005-2007, a ratio that is likely to change in the coming years as utilities are switching to cleaner sources at a faster rate than industrial emitters, which have more costly abatement options.

PRICE IMPACT

Altering the proportion of allowances handed out for free won’t change the overall supply and demand balance in the EU ETS and therefore would not have a direct impact on carbon prices. But it could have an indirect impact by driving a change in behaviour from market participants.

For instance, analysts at Thomson Reuters Point Carbon increased their EUA price forecasts by one euro over 2017-2020 when the proposal was published in July because its free allocation for industry was lower than they expected. They said this would mean factories would opt to hoard more of their surplus units for later use rather than sell them to raise cash.

One speaker suggested carbon prices would be as little as €2 now, rather than over €8, if industry were not hoarding their surplus free allocation built up over previous years and instead dumped them on the market.

He added that the reverse would be true in times of scarcity and in Phase 4 power generators could be forced to pay an enormous premium to tempt industrial companies to sell their freely obtained allocation, “cashing in as a supplier of last resort” and driving prices as high as €60.

BIGGER SHARE

Several speakers argued that industries should be entitled to all the free EUAs they need up to the benchmark of the cleanest performing facilities in each sector, to ensure they could compete with foreign rivals not subject to carbon costs.

One said this could probably be done by taking advantage of a loophole in the MSR regulation, which left open for subsequent legislation whether units could be taken from the MSR pot of allowances to address carbon leakage.

Participants questioned whether the Commission proposal could be amended so that the 57% figure is merely the starting point from which the share of auctionable allowances should be calculated.

Others said the proposal should keep the 57% level and better target the remaining free allowances to those at risk of carbon leakage, otherwise it undermines a key aim of incentivising companies to invest in cleaner technologies.

“The Commission doesn’t go far enough to say who deserves the free allocation,” one attendee said, referring to an earlier leaked impact assessment that showed some industries were better able to pass carbon costs on to their customers than others.

The proposal must be agreed by a majority of EU member states and the bloc’s parliament, which is expected to take at least a year as lawmakers have only just begun to debate it.

By Ben Garside – ben@carbon-pulse.com

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