–EU will struggle to abide by WTO rules should it seek to retain two-pronged industry protection: Sandbag
By Mathew Carr
March 11, 2021 — London: European Union carbon allowances hit another record, this time above 42 euros a ton, as the region signals it won’t be taken advantage of because of its climate ambition.
Futures hit that level today after lawmakers adopted a double lock for industry to ensure the region’s high domestic carbon prices won’t give an unfair advantage to manufacturers outside the region seeking to tap EU consumers.
Members of the European Parliament have this week considered applying a carbon “adjustment” on the border to protect against unfair competition from countries with weak climate ambition that want to export to the EU. Secondly, they are declining to readily give up the current system of industrial protection — where European nations including the U.K. give away free carbon allowances to manufacturers at risk of unfair competition.
Power utilities mostly need to buy all their allowances because there’s very limited cross-border trade in electricity across Europe’s outside borders.
Creating the double lock was a close-run thing and didn’t please all environmental lobby groups.
“Parliamentarians have missed an opportunity” in phasing out free allocation, said Sandbag, one lobby group, by email.
“Despite the ENVI Committee’s carefully worded compromise on the phase-out of free allocation coinciding with the introduction of the Carbon Border Adjustment Mechanism, the European People’s Party Group proposed amendments to remove this aspect of the report, which were approved by a narrow margin on Tuesday.”
“Combining free allocation with a CBAM doesn’t necessarily translate to a strong negotiating position,” said Ciara Barry, EU Climate Policy Campaigner, in an emailed response to questions.
The EP report doesn’t explain how the two could co-exist, only that double protection should be avoided. When industry actors are pressed about this, they say that free allocation could be maintained, and the CBAM only applied on imported goods for emissions in excess of the emissions covered by free allocation, i.e. emissions above the benchmark level. This is a relatively very small share of emissions and the resulting CBAM would not be significant enough to really have an impact as a negotiating “stick” at the COP [Glasgow talks] (no free allowances + CBAM applied to the full carbon cost of imports would be much stronger). At the same time, there also needs to be the negotiation “carrot” whereby the EU is seen to make efforts to bring the CBAM in line with WTO rules, which is unlikely to be possible if free allowances are maintained: Barry
The double lock is significant because a key problem for countries leading the charge on climate protection is that other nations take advantage of their leadership and ride for free on their efforts.
Europe has helped slash the cost of solar power and reduced dramatically the price of offshore windpower. It’s now doing the same for recycled fuels and clean hydrogen. It’s embarked on expensive and politically risky policy measures to do so, such as carbon pricing, feed-in tariffs and contracts for difference. It’s shown the world what works best.
It’s reward? Other big countries and regions have continued to take an unfair portion of the world’s remaining carbon budget, and/or scaled back their own climate ambition. The U.S. has boosted coal, oil and natural gas exports. China and India are expanding coal use still, despite the risks. Brazil has decided not to protect its rainforest so much. Russia’s protecting its own ability to sell fossil fuels for decades to come.
All the while, these countries pay lip service to the global climate talks which have sought largely in vain to cut emissions for more than 30 years. Global emissions are instead two thirds higher than back then.
[To be sure, Europeans are one of the key groups of rich people who have most damaged the climate and have used up more than their fair share of the global carbon budget given the Paris temperature targets.]
The strongish stance by the EU Parliament, whether on purpose or accidental, may be giving traders in its carbon market confidence the region knows what it’s doing: playing what’s still at the end of the day a very disappointing global “game” of hardball politics ahead of United Nations climate talks in Glasgow, Scotland, in November.
The EU carbon allowances could keep rising, according to Tom Lord, trading and risk management executive at Redshaw Advisors Ltd. in London.
“We are in unchartered waters and there is little to stand in the way of further gains,” he said March 10 in a note. “However, having risen more than €5 in as many days it is likely the gains will take a breather at some point as traders take profit.”
EU December carbon futures were up almost 2% to 42.34 euros a ton at about 2:30pm in Amsterdam on March 11, after rising above 42.60 euros earlier in the session: ICE Futures Europe data:
(Adds “to be sure” paragraph near the end for balance, updates Co2 price, adds Sandbag.)