On Wednesday, the EU Commission will release new legislation to reform Europe’s key climate policy, the EU Emissions Trading Scheme (EU ETS). This will kick off a year-long debate about how best to marry low carbon ambitions with economic competitiveness.

In our new briefing we explain how the current rules are not sufficiently encouraging major industrial emitters to invest in decarbonisation, and shares its recommendations for reform. Sandbag also launches a new interactive data tool illustrating how many spare free emissions rights industry has built up over time, and forecasting future supply balances.

The total picture of the carbon market remains one of an enormous oversupply of permits. As a whole group, European industry receives enough free permits to cover current activity levels up to 2023, and certain sectors, such as cement sector, well beyond 2030.

Figure 1. Projected carbon allowance surpluses for the ETS cement sector in all countries (a screenshot of the tool)

There is currently almost no carbon price stimulus for innovation. However, due to different trends in industrial sectors and how the rules apply, oversupply varies widely between different industry sectors and countries. Almost nobody will receive full exemption from paying a carbon price in the future. There is also currently insufficient support for industrial innovation using any technologies other than renewables.

More industrial installations are closing or reducing production in Europe than are opening. This is not due to the carbon price, but in the future tightening caps could exacerbate this trend, unless policies are introduced to properly reward investment in modernisation.

Figure 2: Number of industrial installations first emitting in each year since 2008, and registered as closed in each year; all sectors and all countries except Croatia and Iceland (a screenshot of the tool)

Figure 3: Number of industrial installations emitting in each year; all sectors and all countries except Croatia and Iceland (a screenshot of the tool)

"New technologies and approaches that can reduce greenhouse gas emissions can also boost the EU’s productivity and secure inward investment" says Damien Morris, Sandbag's Policy Director. "To achieve this, the policy framework needs to be carefully balanced. We do not believe the rules for industrial sectors are balanced at the moment – they are too lax in some respects and too harsh in others. The political storm that is brewing as caps on emissions tighten needs to be discharged. Policymakers need to look carefully at the evidence, step up to the challenge and introduce the necessary changes".

To discharge the coming political storm Sandbag suggests key policy recommendations for the post-2020 period:

·         More targeted distribution of free permits in the future, so those genuinely in need of protection against carbon leakage receive it;

·         Less punitive application of the rules which reduce the total volume of allowances available to industry (i.e. the so-called ‘cross-sector correction factor’);

·         A bigger focus on providing support for investments in deep decarbonisation options in industry (e.g. CCS and electrification);

·         A rejection of the idea that industries with big electricity bills should receive new kinds of compensation