EU ETS reforms must balance restriction and protection

Protecting the environment must not come at the expense of jobs, writes Hans-Olaf Henkel.

By Hans-Olaf Henkel

01 Jun 2016

The Commission proposal to limit free allocations to the industry and to introduce a tiered approach, would not only lead to further job losses in German industry, but also to higher CO2 emissions, because nowhere else is production cleaner and more efficient than in Europe. 

The Commission wants to cut 70 per cent of free allocations, while the amount of free certificates would be allocated according to the carbon leakage potential of the respective sectors. The calculation of carbon leakage status is based on two factors: trade intensity and carbon intensity, which is problematic. The data do not only vary in their quality and comparability between, but also within, industries. 

Therefore, this system inevitably leads to discrimination against certain sectors and companies. One should, therefore, not apply a one-size-fits-all approach but rather consider the energy sector and industry separately. The energy sector is already receiving great support within member states, for instance in Germany through the renewable energies act (EEG), and would receive with the Commission proposal further protection - at the expense of industry. 


Since one cannot assume the same potential in both sectors, we need to prevent discrimination and introduce additional free allocations based on production growth and apply different strategies for each sector. 

Did the Juncker Commission not point to growth and jobs as its top priority? Did not they want to achieve a re-industrialisation target of 20 per cent? With this proposal, the Commission will be achieving the exact opposite. Once again, there is a large discrepancy between the demands of the Commission and their deeds. The share of industry gross value added (GVA) has declined in almost all western European countries since 2000. This will now not be stopped, but rather accelerated. 

It must be acknowledged that a purely European ETS system is neither enough to tackle climate change and global warming, nor to create “green jobs”. Its effectiveness on reducing emissions is questionable. The EU has indeed reduced its emissions, but the amount of imported emissions has increased, due in part to carbon leakage and a global shift of emissions to the east. 

Climate change is a global problem, which requires a global solution. A European system is therefore not enough, as it ignores the global aspect of climate change and creates a paradox: companies which emit the most get the biggest exemptions to avoid the risk of carbon leakage and competitive disadvantage. 

However, the ETS is still the 'best' market-based instrument at our disposal. The EU must therefore lead by example, but should strive to ultimately link its carbon market with others. Integrating the EU system with the Swiss, Korean and Chinese systems is currently in discussion. Australia will be introducing the so-called “safeguard mechanism” in July and will be linking its ETS with the EU's. A successful outcome would no doubt generate momentum and deepen cooperation and integration of markets internationally. 

Though there is a need to restrict the number of sectors on the carbon leakage list to the most important ones, there also needs to be a balance between this restriction and the 'protection' of upstream and downstream sectors, which are also indirectly affected. These sub-sectors are often more efficient than their global competitors. Yet, with the trade and carbon intensity formula, they are not fully protected. Instead of introducing a one-size-fits all approach, it would have been a more effective approach to evaluate the regulatory impact for each sector based on qualitative and quantitative methods.

When it comes to the innovation fund, it should be noted that companies in the private sector, especially the larger ones, do not lack funds for innovation. Across OECD countries, we see that publicly funded industrial innovation is not enough. Instead of spending public money for large businesses, we should create a business-friendly environment and grant them access to energy sources for an affordable price. The more diversified our energy mix is, the more resilient will we be. 

Therefore, we have to clear the way for research and innovation for all useful technologies, be it renewables, nuclear or carbon capture and storage technology. So far, European policies have been subsidising and protecting the energy sector in its endeavour to reduce emissions, mostly in incentivising renewable energy development. In some instances, the energy sector has even been supported twice, through ETS but also state aid programmes, such as the renewable energy act in Germany. 

We often forget about Europe's manufacturing base and the wider industry, providing jobs and contributing to our continent's wealth. It is time to strike a balance between industrialisation ambitions and climate policies.


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