The EU’s Emissions Trading Scheme is the cornerstone of its decarbonisation policy, but it is currently under fierce pressure for reform from industry groups and some member countries, writes Andrew Warren on the Business Green website.
Why Europe’s flagship climate policy – the ETS – is under threat
The European Union’s Emissions Trading Scheme (EU ETS) is viewed by some as the most successful carbon saving policy measure created anywhere in the world. But now some of the largest and most powerful companies are systematically setting out this spring to weaken – even destroy – its effectiveness.
For months, some eastern European governments have attacked the EU’s environmental policies, arguing that onerous green rules are strangling their economies. Austria’s Chancellor Christian Stocker is calling for widespread exemptions from the cap and trade scheme, reportedly arguing that “becoming greener cannot be our goal, it means becoming poorer”. Similarly, both the Czech and the Slovak governments are calling for a – hopefully temporary – complete suspension of the ETS. Even German Chancellor Friedrich Merz has called for a revision of the ETS.
But to date, most of the concessions made regarding the EU’s flagship Green Deal programme have concentrated upon weakening more tightly-targeted initiatives, such as lowering reporting requirements for emissions, and loosening longer term objectives for electric vehicles (EVs).
A bedrock of EU climate policy
Covering almost half of all emissions, the EU ETS is the bedrock of EU climate policy. I should disclose here that I was myself a member of the working party that prepared the initial trading scheme – yet still, the impact of the ETS since its introduction is undeniable.
Since its introduction in 2005, carbon pollution in the sectors it covers – energy intensive factories, power plants, internal EU flight travel and shipping – has been cut in half, EU Perspectives has pointed out. In contrast, emissions not covered by the ETS have fallen by only around a fifth.
For the first 15 of the past 20 years since the scheme was introduced, it included 1,400 UK industrial sites within its scope. Following Brexit, the UK opted to exit the EU’s ETS and instead set up its own trading system covering UK manufacturers. The UK ETS is very similar, but nonetheless consistently trades at a discount.
Earlier this month – on 11 February – Energy Security and Net Zero Secretary Ed Miliband told MPs on Parliament’s ESNZ Committee that the EU and subsequent UK ETSs had done “a really important job of helping to decarbonise our energy system”. He confirmed that negotiations towards fully aligning the EU’s ETS with that of the UK’s had been “embarked upon” because “the manufacturing industry has almost universally said ‘actually we want to see linking with the EU ETS, because we think that it is better for us'”.
The ETS concept is simple. As European Commission President Ursula von der Leyen has put it: “If you want to pollute, you pay. If you don’t want to pollute, innovate.”
In the ETS, higher fuel and higher carbon prices strengthen the incentive to slash emissions, turning more expensive clean technologies into sound investments. But they also add to companies’ operating costs – albeit only marginally as Europe’s high energy prices, driven by imported fossil fuel prices, present a far greater problem.
‘Save our industry’
Earlier this month Politico reported that an ad campaign for the chemical industry has been running in Brussels metro stations, which states in bold letters: ‘Alarmed? You should be. Europe is losing production sites, quality jobs and independence.’ The advert then reportedly ends with the plea ‘save our industry’.
Since 2023 over 200 major chemical sites have shut across Europe, costing some 30,000 jobs. The trade union INdustriALL warns that on present trends, a further 200,000 jobs will have gone by 2030.
Warnings from the leaders of the chemical industry are deafening, if well-orchestrated. “Increasing carbon costs drive value chains out of Europe”, BASF CEO Markus Kamith reportedly warned the audience at a recent event in Antwerp. The German chemicals giant is currently embarking on its biggest investment ever: a €10bn mega plant in China, and in an interview with The Financial Times earlier this month Kamithe described the EU ETS as “obsolete”.
Meanwhile, the CEO for INEOS’s olefins and polymers businesses in Europe, Rob Ingram, has claimed that “de-industrialisation of Europe is actually worse for the planet”. And Peter Huntsman, CEO of the petrochemicals firm Huntsman, has also been critical of the ETS: “Are we accomplishing anything? The chemical industry does not have 10 years left.”
‘Peeing in your pants’
To boot, in response to pressure from the agriculture industry, the European Commission is also proposing to remove – even retrospectively – the entire fertiliser industry from its new Carbon Border Adjustment Mechanism (CBAM) within the EU ETS. It reasoned that including the fertiliser sector within the carbon border levy policy risked “doing severe harm to the EU internal market, due to serious and unforeseen circumstances related to the impact on the price of goods”. However, exempting sectors from CBAM also weakens the EU ETS.
This summer the EU is set to propose revisions to its underlying green governance rules, national emissions targets and carbon absorption goals for each of its 27 member countries – and in July it is also expected to reassess the entire ETS. The chemical industry wants at minimum more free allowances, a longer timetable for phasing out emissions, and the inclusion of carbon removal credits. As of now, they are confident they will win all of these.
However, it is hard not to feel that such wholesale changes to the ETS, such as those advocated by heavy and chemicals industries, risk doing far more harm than good to Europe’s economy – and indeed the climate.
As Emma Wiesner, MEP for Sweden’s Centre Party, told Politico recently: “Keeping our oil and gas dependency is really the most effective way to keep industry trapped in high prices and large vulnerabilities. If we have high energy prices, giving up on the principles of the ETS is really like peeing in your pants. It may give short-term relief. But longer term, we are just punishing ourselves.”
About the author: Andrew Warren was a special advisor to the House of Commons’ Environmental Audit Committee. He now chairs the British Energy Efficiency Federation.
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