A decade wasted for industry decarbonisation
Due to low CO2 prices and generous free pollution permits under the current Emissions Trading System, European industry has lost a precious decade to decarbonise. It is time to end free lunches for polluters at the expense of taxpayers and the environment and put industry decarbonisation back on track.
Alberto Vela and Samuel Gregory-Manning report.
Last week, EPP MEP Peter Liese set out to his fellow parliamentarians a report of proposals to reform the European Union's Emissions Trading System (ETS).
The ETS is a key pillar of EU climate and energy policy: a market-based instrument, it allows companies to trade greenhouse gas emissions allowances and aims to incentivise them to reduce their emissions.
As part of the Fit for 55 package, which is overhauling EU legislation to reach the goal of reducing greenhouse gas emissions by 55% by 2030, the European institutions had initiated a revision process of the ETS.
Drastic changes are sorely needed for the ETS if it is to contribute to the European Green Deal and its commitment to make Europe the first climate-neutral continent by 2050, while also ensuring the achievement of a zero pollution, toxic-free and circular economy.
MEP Liese's proposals go some way to achieve this, but in their current form, the end result would still send mixed signals on the urgency with which the EU's biggest polluters and CO2 emitters must decarbonise, said the European Environmental Bureau.
Let´s take a deep dive into the top ways MEPs and the Commission can raise the ambition of the ETS revision to truly align with the EU's climate and zero pollution goals.
No more dining out on taxpayers' money
The ETS in its current format means that industry gets to dine out on an outrageous discount while EU citizens foot the bill - it is time to end free CO2 allowances for big polluters.
According to market operators' forecasts, up to EUR550 billion of public funds will be transferred for free to industry by 2030. This is equal to two-thirds of the EU's Next Generation funds earmarked for recovery from the COVID-19 pandemic.
Instead of dishing out free dinners for industry at the taxpayers' expense, the Commission's proposal for a Carbon Border Adjustment Mechanism must replace free allowances well before 2030. Furthermore, the updated ETS should tighten the emissions cap to meet 70% of emissions reduction by 2030.
Planning for success
MEP Peter Liese's report included the proposal to establish Climate Neutrality Plans for industry operators. This is a step in the right direction, but if such plans are to truly deliver on the Zero Pollution ambition of the EU, they would have to be binding, holistic and defined by clear and measurable actions.
What's more, the process by which these plans and their milestones and ambitions should include multiple stakeholders and not be left to just industry operators alone. The plans could be even more effective by being applied to the mother company level, meaning that climate action could reach beyond the physical borders of the EU.
Laying waste to waste
Waste incineration being included in the scope of the ETS is a timely addition: waste incinerators are enormous polluters in the EU, with their emissions having mushroomed by 288% between 1990 and 2017, and continuing to grow. The amount of greenhouse gases they emit equals the emissions of 13.4 coal-fired power plants each year.
Tackling waste incineration would also help promote a circular economy, dangling an economic incentive to reduce waste and improve the separation of waste in collection. Sweden provides a good example, where the EU-ETS is applied to waste incineration and 75% of plastic waste is now recycled instead of incinerated.
Such an urgent problem with a proven solution means it should be tackled as soon as possible, not by 2028 as proposed by MEP Leise's report.
Make fossil fuels a thing of the past
Fossil fuels must become an energy source of the past - and so they also must not receive financial support under the EU Budget's Modernisation Fund. Loopholes in its current setup leave the door open for doling out financial support to fossil fuels, risking locking-in some of the EU's poorer Member States into continued reliance.
Nuclear energy is already excluded from the Modernisation Fund but ambiguous wording could let fossil fuels slip through. Ditching the ambiguity to make the wording clear that no support will go to nuclear energy-related technologies, projects or installations or fossil fuels-related technologies and projects, would bring the Modernisation Fund in line with the green transition to climate neutrality and zero pollution.
Coherency is key
The ETS must be coherent with the wider objectives of the European Green Deal on achieving zero pollution - this means adopting a combined approach between the ETS and the Industrial Emissions Directive (IED), another important piece of EU legislation that sets performance-based standards for industry.
Industry has been able to get away with pollution by using a loophole to circumvent energy efficiency standards - thanks to one pesky article of the ETS, Article 26. This article stops Member States from setting emission limits for industrial installations in operating permits, except to protect local air quality, while energy consumption and efficiency standards are classified as 'optional'.
Deleting Article 26 and replacing it with obligations to switch fuels and switch to electrification, alongside compliance with energy efficiency standards would go some way to transform industry and kick pollution at its source.
Power to the people
Despite being a big driver of the decarbonisation process of the EU economy and determining where large chunks of public money go, discussions on the ETS have remained the preserve of policy-makers, experts, carbon market and financial operators and industry. For too long the ETS has been relatively unknown to the EU citizens, which means they cannot scrutinise how revenues generated from the auctioning off of ETS allowances are spent.
Allowing citizens and NGOs to challenge these decisions would ensure accountability so that the money is truly spent on reducing emissions and not on increasing them. Amendments to achieve this relate to access to justice for how Member States decide to spend revenue, as well as how the investment committee and the European Investment Bank make decisions for EU-level allowances. This would also fulfil the EU's obligations to align with the Aarhus Convention that provides for peoples' right to access information about the environment.
No more time to lose
The climate crisis cannot afford another lost decade. All economic sectors can and must do more to help us achieve the Paris Agreement goal of limiting temperature increase to 1.5C temperature. It is up to MEPs and the European Commission to raise the ambition to make the Fit for 55 and the EU ETS fit for climate neutrality.