European industries face a new risk to their share of free carbon allowances as France seeks to ensure that after 2020 the handouts are made conditional on carbon pricing outside the bloc.

The European Commission’s post-2020 EU ETS review proposes to keep free EUA allocations for industry up to 2030, albeit with the amount decreasing annually.

But France wants the proposal to take into account the development of carbon pricing in the rest of the world, which could cut the subsidies to reflect the lower risk of carbon leakage as more countries put a price on their emissions.

France’s idea, heard at a seminar hosted by the Centre for European Policy Studies (CEPS) last week, could pile billions of euros of additional costs on big emitting EU industries as they are forced to pay for their allowances.

France is open as to how this could be done, said one participant at the CEPS event, which was held under the Chatham House Rule, where the source of shared information is not attributed in an effort to stimulate debate.

“The ETS should be prepared for domestic consequences on carbon leakage measures – [this could] to some extent lessen them,” the participant added.

Any amendments would need to be agreed by a majority of member states and the EU Parliament in a process expected to take at least a year. Talks are at an early stage, with most member states, lawmakers and lobbyists yet to take firm positions.

But as hosts of next month’s UN climate summit, France has put forward some of the most ambitious suggested changes, including raising the prospect of eventually deepening the 2030 emission target and including cement importers in the bloc’s carbon market.

Including a provision to factor in foreign actions addresses a gap in the Commission proposal, a plan that was based on the guidance laid down by all EU leaders at the European Council in Oct. 2014.

While setting an overall 2030 emissions reduction target, the leaders agreed that “free allocation will not expire”, but said the so-called carbon leakage protection measures would only continue “as long as no comparable efforts are undertaken in other major economies.”

As it stands, the Commission proposal offers no way to assess if such comparable efforts are in place.

TRANSITIONAL MEASURES

Since it began in 2005, the EU ETS law was written according to the bloc’s ‘polluter pays’ principle for environmental protection, with free allocations only intended to be provided as a transitional measure to guard against carbon leakage.

Progresss has been slow among other emitters, but jurisdictions with emissions trading systems now account for 40% of global GDP, a ratio expected to increase to reflect post-2020 commitments under a global climate pact to bind all nations and due to be signed in Paris next month.

“The more there will be a carbon price in our competitive economies, the less we will see carbon leakage becoming an issue,” said Wendel Trio, director of green group coalition CAN Europe.

He was speaking at Politico’s EnergyVisions event on carbon leakage last week, where several industry representatives outlined the ongoing risk of investment draining from Europe to places with looser environmental policies.

Despite the proliferation of new carbon pricing initiatives, jurisdictions have followed the EU in giving generous free allowances to industry, damping the incentive for them to invest in carbon-cutting technologies.

This has led economists to urge all major economies to cooperate to strengthen their policies to overcome competitive concerns.

SURPLUS WINDFALL

At the EnergyVisions event, Karl Buttiens, head of environment and global CO2 strategy at steelmaker ArcelorMittal, said his firm would continue to seek a 100% free EUA allocation despite appearing to recognise a need to take foreign pricing initiatives into account.

“Even if we say there are many more countries in the world that have carbon regulations, it is not sufficient to have carbon regulations. You have to see how severe the carbon regulation is, and [if the] burden [is] comparable,” he said.

Last year was the first time in the 10-year history of the EU ETS that ArcelorMittal has not been the recipient of the largest annual EUA surplus, pushed into second place but still receiving 6 million more free units than it needed to cover its 2014 emissions of 54 million tonnes, according to Carbon Market Data.

The steelmaker has booked €440 million in windfall profits over 2010-2014 by selling its surplus units, according to its annual financial reports compiled by environmental campaigners Carbon Market Watch.

“I will not deny the figure but you have to realise there will be nothing of the surplus left by 2020,” said Buttiens.

“In 2021, we will pay more in one year than we earned in 10 years of surplus credits,” he added, referring to the Commission’s proposal, which seeks to scale back the overall free allocation while enacting reforms to boost carbon prices.

This, however, could lead to a potentially significant decrease in government auction revenues from current levels.

The market value of the free allocations in Phase 4 (2021-2030) will be around €160 billion, compared to roughly €50 billion in Phase 3 (2013-2020), the Commission has estimated.

By Ben Garside – ben@carbon-pulse.com