EU ETS reform: It's time to think outside the box

ETS reform should be about defending climate ambition and jobs through investment, not big business shareholders' gains, writes Edouard Martin.

By Edouard Martin

31 May 2016

Proper reforms are impossible without good stocktaking of the past and present. For supporters of the status quo - including, sadly, the European Commission - the system works. In the sectors linked to the emissions trading scheme (ETS), the EU falls well below its projected emissions. 

So much so, in fact, that there has been very little demand on the market, hence the exceptionally low CO2 price. This price has remained at alarmingly low levels and the system had to be 'saved' twice, first with backloading and then the market stability reserve mechanism, entering into force in 2019. 

Both moves were the right thing to do in order to save the ETS as a whole, but is this really how a virtuous system is meant to work? And how exactly did we reduce our emissions? Did we achieve this result by maintaining but sobering our carbon-intensive industries in Europe? Or did we suffer massive closures of installations? 


While the exact impact of the financial crisis on European deindustrialisation (and therefore the lowering of CO2 emissions) is disputed, it has undoubtedly played an important role. Probably more so than the carbon price which, as we have seen, has been exceptionally low (which is why studies concur in establishing that there was no carbon leakage during phase 3 up to now). But at the same time, a low level of CO2 price is not a good driver for future investments.

This means that there have been emissions reductions but for the wrong reasons and a CO2 price signal that is not working. Surely, this is not the kind of pattern we want to maintain for ETS phase 4 (2021-2030). Yet, when reading the Commission's proposal, it only seems to be a matter of tinkering here and there.

When listening to the numerous representatives from the equally numerous industrial sectors impacted by the ETS, a three-word mantra keeps coming back: "more free allowances".

In other words, more of the same, although perhaps in a more targeted manner and even then only as long as you're on the 'good side' and continue to get your 100 per cent free quotas.

Don't get me wrong: I was a steelworker for over 30 years and I am all for a strong European industry. However, I dare ask a simple question: since when do free allowances equate actual investments in European plants? 

As a former trade unionist, I have seen first-hand how my former employer endowed himself and his shareholders with money he got for free from the system, no strings attached (the so-called 'windfall profits'). There was no earmarking once the allowances were monetised. This element is still lacking, even in the Commission's phase 4 proposal.

Yet even with that kind of improvement, I am not convinced that we would establish a genuinely virtuous system. After all, free allowances were never to be at its core: the 'polluter pays' was supposed to be that guiding principle, with free allowances acting only as temporary protection against non-EU competition.

Unfortunately from an industry perspective, investment in cleaner and more efficient processes and installations as a cornerstone was replaced by a mere cry for compensation.

So back to square one: if we believe in the 'polluter pays' principle (and I certainly do), then let's make it so for all polluters intending to sell on our market. Europe cannot export jobs while importing pollution and poor working conditions.

I believe it's time to think outside the box; for example, if we are to solve this quid pro quo in a proper way, that is going towards total auctioning of CO2 allowances while maintaining a level playing field for our producers, we should include importers - a potential tool actually included in the version of the ETS directive currently in force - or include carbon consumption.

Of course, there is no perfect solution; I am well aware of the debates over the WTO-compatibility of border carbon adjustment measures - even though there is ample literature showing that there is a case for compatibility - or over the acceptable legal basis for the inclusion of consumption of carbon-intensive materials, both fiscal or environmental. In any case, obviously that type of paradigm shift cannot happen overnight.

We might need to keep some sort of free allocation system - even if seriously streamlined - for a limited period of time. Let's remember here that these were already meant to disappear after 2020. Our plants will not stand a further 10 years of under-investment under the deceiving veil of free allocations.

That is why we cannot delay tough debates and tough - but sustainable - decisions. It is time to devise a system which will guarantee our ambitious energy and climate engagements, while maintaining a strong industrial capacity in Europe, with the growth and jobs this entails. Today's proposal for ETS phase 4 is the right vehicle to do just that.


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