Energy-intensive industry could get ‘freedom to pollute’

Power companies will have to pay for permits to pollute from 2013, but energy-intensive industries will get some free permits until 2020 under plans being developed by the European Commission.

On 23 January, the Commission will publish its review of the EU’s emissions trading scheme (ETS), which aims to reform the scheme from 2013.

"Auctioning should be the principle for all allocation, as it is the simplest and most economically efficient system," says a draft of the proposal for a directive. "Full auctioning" will apply to power companies, refineries and carbon capture and storage installations, although there will be some free permits for electricity companies that generate heat for industry.

The proposal says that auctioning will "eliminate windfall profits" - an acknowledgment of the problems that beset the ETS in its first phase when the price of carbon plunged after the Commission handed out too many free permits. In the first phase (2005-07), 95% of permits were handed out for free. In the second phase (2008-12), which began last week, 90% of permits are free.

But energy-intensive industries, such as the cement and steel industries, will get some free allowances after 2013. These sectors would get a percentage of free allowances which would be reduced each year, falling to zero by 2020. There are no numbers cited in the proposal seen by European Voice but Reuters has reported that power companies would get for free half the permits they receive now and other companies would get 90%.

Satu Hassi, a Finnish Green MEP, said that she favoured full auctioning, but thought "special adjustment" measures were appropriate for energy-intensive sectors, such as the cement, paper and steel industries. "Some sectors will face troubles if there is 100% auctioning and if there is only in Europe a price for carbon," she said.

In addition to free permits, the Commission is also considering tariffs on carbon-heavy foreign imports. This means that countries that do not participate in a successor to the Kyoto Protocol could face carbon tariffs on their imports to the EU, or in the language of the energy review, so-called trade-related measures to deal with the risk of "carbon leakage".

But the Commission is divided on the proposal. Peter Mandelson, the trade commissioner, has been reported as saying that it could be hard to implement.

Chris Davies, a UK Liberal MEP, welcomed the idea of tariffs, arguing that they would create a level-playing field for business. He said: "It makes more likely an emissions trading scheme on a world-wide basis, if manufacturers in China know they are not going to gain entry."

Business groups, however, warned that tariffs could provoke trade wars. Folker Franz, a senior policy adviser at BusinessEurope, the employers’ federation, said that a border tax might start trade retaliation. "If you impose import measures on others, the others might do the same," he said, adding that, as an alternative, the EU should promote the clean development mechanism, an arrangement allowing European companies to invest in carbon-reduction projects in the developing world.

So far, the Commission has ignored calls to extend the emissions trading scheme to include international shipping. But there will be pressure for a separate directive if shipping is not included in the final proposals on 23 January. Hassi said: "International shipping should be included in one way or the other. The EU should prepare unilateral measures for shipping as for aviation."

What is in the package

The energy package, to be published on 23 January, will flesh out how the European Union might achieve headline targets to cut carbon emissions and increase the share of renewable energy. The Commission is expected to publish proposals on five areas:

• Burden-sharing (‘effort-sharing’) proposals

• Renewables directive

• Review of the European emissions trading scheme (ETS)

• Proposals on clean coal and carbon capture and storage (CCS)

• Publication of new rules on state aid and the environment

The draft proposals are being discussed internally within the Commission. Directors-general were discussing the plans for the ETS review and burden sharing today (10 January).

Power companies will have to pay for permits to pollute from 2013, but energy-intensive industries will get some free permits until 2020 under plans being developed by the European Commission.