EU Lawmaker Proposes Changes to Free Carbon Permits Allocation

15 April 2016 | Markets

The European Union should change its rules on handing out permits to emit carbon dioxide after 2020 to better protect businesses at risk of relocating to regions without pollution curbs, according to a proposal by European Parliament member Fredrick Federley.

Federley, the lead lawmaker on EU carbon-market reform in the Parliament’s industry committee, seeks to modify a draft law by the European Commission through introducing varying levels of free permit allocation to companies. The commission said in July 2015 that companies in the emissions market should continue buying most of the allowances at government sales and best-performing businesses in sectors prone to the relocation, also known as carbon leakage, should keep getting a bigger share of permits for free.

In the 2015-2019 period, the EU carbon-leakage list includes more than 170 industries from manufacturers of steel, lime and cement to producers of dietetic food.

“What I am proposing is that I’m moving towards a more targeted approach, one that has been called in the debates a tiered approach,” Federley said in a telephone interview from Strasbourg, France. “The proposal is about making different tiers where you have companies at the highest risk getting 100 percent free allowances, then those with still very high risk getting maybe not 100 percent but rather many free permits and those with rather low risk that should be sufficiently protected but in a more adequate way.”

Climate Change

The EU emissions trading system, Europe’s flagship policy tool to reduce greenhouse gases blamed for climate change, imposes decreasing pollution caps on around 12,000 installations owned by manufacturers and utilities. The bloc’s 28 national governments and the EU Parliament started work last year on the commission’s proposal to adjust the cap-and-trade program to tougher 2030 emission-reduction targets.

The EU will deepen its carbon-cut goal to at least 40 percent in 2030 from 20 percent in 2020 compared with 1990 levels, EU leaders agreed in 2014. The political deal needs to be translated into law, which requires qualified majority support from member states and majority backing from the EU Parliament to enter into force.

The 2015 draft law by the EU regulatory arm inadequately protects companies most prone to carbon leakage, which face a risk of not getting 100 percent of permits for free, according to Federley. That’s because of the so-called correction factor, which the commission is entitled to apply across industries to ensure that the total number of free allowances requested by governments doesn’t exceed the maximum allowed under EU law.
Correction Factor

“My basic argument is that the number of permits in free allocation is not enough for everyone so we have to make some choices; I also want to minimize the risk of the correction factor kicking in and taking away the same amount of permits for both well-performing and poorly-performing industries,” said Federley. “Some industries today have about 17 percent of allowances taken away even though they were guaranteed to get 100 percent for free.”

Federley, a Swedish member of the European Parliament from the Liberal group, is tasked with drafting a report in the industry committee as a part of the assembly’s legislative work on the EU ETS reform. Shadow rapporteurs, or lawmakers representing political groups in the committee on the carbon market file, have until Monday to comment on the proposal that Federley presented to them on Thursday.

“We will have to be able to look at the figures so I’m not ready to say exactly who goes into which tier and which levels the tiers should compensate up to,” he said. “We’re still trying to finalize those calculations.”

SOURCE: Bloomberg