EU climate targets are undermined by ETS subsidies. They must end

(EurActiv, 12 Jul 2021) Some industry groups have called to maintain free CO2 allowances in addition to the upcoming carbon border levy. Their addiction to subsidies must be brought to an end, otherwise Europe risks triggering a trade war that would also undermine the EU’s climate leadership, write Connie Hedegaard and Pascal Lamy.

Connie Hedegaard is former EU climate commissioner. Pascal Lamy is former EU trade commissioner and WTO director-general.

Taken together, a reformed EU Emissions Trading System alongside a first-of-its-kind carbon border levy has the potential to be one of the world’s most powerful climate mitigation tools and promote positive global discussion about industrial decarbonisation.

But a successful delivery of these closely-linked policies is at risk unless the EU removes damaging pollution subsidies for industry – otherwise known as free ETS emissions allowances – when it publishes proposals on July 14 as part of its package to cut over half of all greenhouse gases by the end of the decade.

The whole idea of the ETS has been to drive the low-carbon industrial transition, requiring emitters to pay for their emissions above a certain ceiling by buying auctioned allowances to emit. Industry was provided with what was supposed to be an initial cushion or support in the form of a free allocation of allowances, covering the lion’s share of their emissions. This was intended to allow the system to get established and prevent so-called carbon leakage, whereby cheap high-carbon imports displace domestic production or EU producers move offshore to avoid carbon pricing.

But in the 15 years since the inception of the ETS, the vast majority of emissions reductions have come from power generation – a sector which hasn’t received free allowances since 2013. Emissions from industry meanwhile, which has continued to receive these subsidies, have largely stagnated, falling just 1% between 2012 and 2018.

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EurActiv, 12 Jul 2021: EU climate targets are undermined by ETS subsidies. They must end