There are still billions of euros of waste in Europe’s €1 Trillion carbon market (3)

–Here are three ways that money from the European Union carbon market could be better spent.

Opinion, report by Mathew Carr, citing Sandbag

Dec. 15-16, 2022 — There is no doubt that the European Union is a leader in cutting the heat-trapping gas that’s killing the world’s climate.

Emissions have dropped one third since 1990, but it is far from enough.

Adrien Assous, executive director of environmental lobby group Sandbag in Brussels, reckons the region can still do much better. It needs to do better for the world to have any hope of keeping temperatures from rising to extremely dangerous levels.

The beauty of carbon pricing is it provides a new revenue stream for governments.

That’s is where the €1 trillion comes from. It’s the value this decade of carbon allowances sold and granted in the EU carbon market, the world’s biggest by traded volume, Sandbag estimates.

Scrutiny over money handling by the EU is set to increase as the region is ungulfed in a corruption scandal.

See this from Dec. 15:

Eva Kaili’s partner confesses role in European Parliament corruption case – sources

By Charlotte Campenhout

 and Emilio Parodi

European Parliament vice president, Greek socialist Eva Kaili, is seen at the European Parliament in Brussels
European Parliament vice president, Greek socialist Eva Kaili, is seen at the European Parliament in Brussels, Belgium December 7, 2022. European Union 2022 – Source : EP/­Handout via REUTERS

BRUSSELS Dec 15 (Reuters) – Francesco Giorgi, the partner of ousted European Parliament vice-president Eva Kaili, has confessed his role in a Qatar graft scandal, two sources with direct knowledge of the matter told Reuters.

How to efficiently and credibly spend the climate money is the super important flipside of pricing pollution.

There’s plenty of waste and plenty of opportunities to improve spending, Assous said. His views are pertinent as lawmakers upgrade Europe’s climate-transition rules this week.

First Area of Waste

–In most cases, payment should be given only once the project has achieved actual results that have already protected the climate

The EU’s Innovation Fund, one of the ways the money is spent, is about to hand out €3 billion to spur faster emission cuts. It has an estimated revenue of approximately €38 billion through 2030.

The structure is not right, because up to 100% can be paid upfront, including 40% at signature, Assous said.

It’s not conditional enough, he said.

Because of the low level of technology risk now associated with carbon capture and storage technology (for instance) “there should be more of an incentive to deliver on the project operations and the Innovation Fund is not doing that, it’s giving the money up front and so there is no incentive to deliver on the project,” Assous said.

Sandbag set out its concerns earlier this month, here:

With the fund’s approach, grants can be approved for projects likely to reach financial close within up to four years, Sandbag said. During this preliminary period, the full amount is reserved and not made available to other projects.

There are already some checks and balances, such as the ability to claw back money, but they are not adequate, Assous said.

“A project would be allowed to pay the dividends for a few years and then go bankrupt and then there’s no money” [to claw back], he said.

The fund has already given out about 3 billion euros, while other programs have given an additional sum to the tune of 100s of millions of euros. See this €62 million disbursement from two days ago. Here is a different one for €960 million, also from two days ago.

Money is definitely flowing from the European Climate, Infrastructure and Environment Executive Agency (CINEA), the body that oversees much of the cash. I’ve also reached out to it.

Assous has met some of the people handing out the money and “some of their approaches to business seem so naive,” he said.

Private-sector / non-government organisation-based programs are being tight fisted about money. See this LEAF Coalition, for instance, that’s attracted about $1.5 billion, a sum that will flow only after results have been verified, through 2028:

I yesterday reached out to the European Commission, which today said the following, by email:


1)      The Innovation Fund (IF) grants programme targets first of a kind deployment/commercialisation or large scale demonstration, which have inherent technology risks. Our upcoming competitive bidding programme will target more mature projects and thus disburse the support only after the entry into operation.

2)      However, the Commission has a very rigorous evaluation process in which applications are scored according to 5 award criteria. One of the criteria is Project Maturity (technical, operational and financial). To evaluate this, independent experts assess whether the projects are advanced enough to reach financial close (concept similar to final investment decision, requiring not only that project and financing agreements be signed but also that all the required conditions have been met) and enter into operation. There is a very stringent minimum threshold to be passed (3 points out of 5) on each aspect of project maturity. There are many projects applicants who struggle with this criterion, and the Commission regularly  receives feedback that this is the most difficult part of application process. The high level of competition in the IF in general ensures that only projects with high project maturity score are awarded a grant. It is therefore unlikely that projects awarded would not enter into operation.

3)      The IF can disburse up to 40% of total grant amount upon financial close (or upon reaching a specific milestone preceding financial close that was agreed  in the grant agreement). This early disbursement has to be well justified in the project work packages and is by no means a default way of operation. At least 10% of the grant has to be disbursed after the entry into operation. The disbursement plan has to be justified in the work packages and is part of the overall evaluation.

4) Importantly, the IF funding is based on performance of the project, i.e. the abatement of GHG emissions. The amount of the Innovation Fund support disbursed after the financial close is dependent on the avoidance of greenhouse gas emissions verified on the basis of annual reports submitted by the project proponent for a period between 3 to 10 years following the entry into operation. Only the part of the grant that can be disbursed upon financial close is not subject to recovery because it reflects that the objective of the Innovation Fund is to support innovative projects and thus share part of technology risks. Still the safeguards in place at the moment of evaluation substantially mitigate the risk of projects not being constructed at all or not delivering the abatement of GHG emissions.


Second Area of Waste

–Incentives should be applied to companies that completely change an industry to make it cleaner, not just for incremental change

Currently, the EU rules provide free carbon allowances to factories in various industries from those that make cement to those manufacturing oil products. These free allowances aim to ensure factories don’t shut in Europe because of high carbon prices.

Over the next decade the bloc plans to replace this system with a carbon border adjustment mechanism, where at least some importers effectively pay Europe’s carbon price.

Yet the rules of the carbon market could better incentivize a switch to much cleaner production instead of marginally cleaner production. Funds could be better spent on companies that have almost no damaging emissions, Assous said.

For instance, Sandbag is suggesting the EU create incentives that would help encourage residential builders to use timber instead of cement. Timber is seen as a renewable resource.

The current incentives simply favor the cement with the lowest emissions per ton.

That system is ignoring projects that have much lower carbon, such as those that recycle. It’s assuming that emissions cutting is incremental, when cuts need to be massive.

Roughly half the world’s emissions need to be cut in the next eight years for a good chance to keep temperatures from rising more than 1.5C, according to scientists.

There are many “circularity” solutions, Assous said. One example would be having scrap metal and virgin metal producers compete with each other to provide lower-carbon solutions.

“Europe exports over 20 million tons of scrap steel each year because they are not reusing it. There are no incentives to reuse it, which is nonsense,” Assous said.

For details, see the report.

Carbon Contracts for Substitution

Third Area of Waste

–Would the same money cut many more emissions in another country?

The global climate crisis, because it is now so acute, requires emissions to be cut as cost effectively as possible.

Today’s EU carbon price is €87 a ton, yet some projects in the Innovation Fund cut emissions at €1,300 a ton. See this section of Sandbag’s report:

The ’Cost-effectiveness ratio’ (subsidy per unit of avoided emissions) of the laureate projects shows huge differences between projects: from €5 to €30 per tCO2e claimed by large-scale projects and a few small-scale ones such as CarBatteryReFactory (€3/tCO2e) and NorthFlex (€4/tCO2e), to several hundred euros per tCO2e for Aquilon (€1300 /tCO2e) and NAWEP (€420 /tCO2e), both airborne wind energy (AWE) projects. Such high cost-effectiveness ratios typically have a negative effect on the overall score. In order for those projects to win grants, they must have rated high on other criteria. However, AWE is a nascent technology, consisting of generating electricity by flying kites at high altitudes. It faces a lot of challenges for air traffic security reasons (no operating permits have been granted thus far), so it is unlikely that any AWE project was given a high mark on technical maturity.

Source: Sandbag, Spend Smarter

So, compared with the power-generating kites, the €1,300 would cut 14.9 tons in the EU carbon market, based on today’s market incentive.

Forest-protection markets are paying $3.81 a ton on a near term basis (CME exchange), which implies the €1,300 ($1,603) could save 421 tons of emissions in that market.

All technology is expensive before it builds economies of scale and it needs support initially.

But I’m not convinced now is the right time for Europe to be spending €1,300 to save one ton when there is the opportunity to save 421 tons for the same price.

If the rich 1 billion or so people spend their money cutting their own emissions, while the emerging 7 billion people boost their emissions, the world will still be worse off. Mathematics shows it.

The priority needs to be ensuring the emerging countries take a cleaner, greener path. Encouraging that will cost less than €1,300 per ton.

It’s time for a rethink, on multiple fronts.

(Updates with corruption scandal, earlier with commission comments, added greener path needed, near bottom of the story)

NOTES – related documents

One comment

Leave a Reply