Energy-intensive industries have received too many pollution permits under the EU emissions trading system (ETS), the European Court of Justice (ECJ) has ruled.
Under the ETS, member states allocate emissions permits or allowances to companies that emit greenhouse gases (GHGs). A proportion of allowances is allocated free of charge.
However, several companies, including Borealis, Esso and Dow, asked courts in Italy, Austria and the Netherlands to rule on their demand that national authorities award more free permits to protect them from the impacts of so-called ‘carbon leakage’. This is the theory that companies will move to countries with less stringent restrictions on carbon emissions, leading to job losses in the original country but no overall reduction in emissions.
The companies disputed the way the authorities had decided national allocations for the period 2013-20 and, indirectly, the maximum annual amount of allowances set by the commission in 2011 and 2013.
The national courts referred the cases to the ECJ. But the ECJ ruled that, not only were the firms’ claims unfounded, but that the commission must recalculate the maximum amount of emission allowances allocated. It said the commission’s correction factor, which it uses to take into account the quantity of free permits provisionally allocated by member states, was wrong.
The International Federation of Industrial Energy Consumers Europe (IFIEC) said that it needed to analyse the judgment to fully assess the impact of the ruling and the implications for allocations from 2013 to 2020. But the trade body called for the commission’s recalculation of the correction factor to be more transparent, after complaints by members that the mechanism was too opaque.
The commission is currently reforming the ETS for the period 2021-30. IFIEC called for the reformed system to include a genuine safeguard against direct and indirect costs of carbon leakage.
‘The best performing companies in ETS carbon leakage sectors should not bear further carbon costs,’ it argued. ‘To that end we support an approach based on real benchmarks, allocations based on more recent production data and last but not least an adequate reserve that ensures full allocation to benchmark levels.’
Bas Eickhout, a Dutch MEP in the parliament’s green group, welcomed the ECJ ruling: ‘I have long been fighting against unjustified free allowances, but always run into a wall of politicians who completely go along with the industrial lobby. It is nice now to get support from an unexpected quarter.’
He said the current trading system was too complex and free allowances should only be for sectors that really need them. ‘Companies have made huge profits from selling [surplus] allowances they have not had to pay for,’ he said.
Imke Lübbeke, head of climate and energy at WWF Europe, said: ‘The ETS needs to be reformed in order to make polluters pay, rather than paying polluters, as today’s ruling confirms. Policy makers must ensure that the European carbon market delivers more and faster emission reductions, and commit to phasing out free pollution permits.’
She said there is no evidence of carbon leakage: ‘We must not allow scaremongering by a handful of large polluters to undermine the ETS, and its ability to deliver a high level of environmental protection.’
