Last Chance to Save the EU ETS!

When you think it’s all over, it’s only just about to happen. Probably the most important part of the EU ETS, the Free Allocation Regulation (FAR), will end its consultation process in just a few weeks from now.

The FAR should be setting the incentive for industry to respond to carbon prices by reducing its CO2 emissions intensity, making carbon prices less volatile, and making the EU ETS actually work (i.e. reduce emissions). However, in the current system, polluting plants receive more emission permits than less polluting ones producing the same things, and they get more if they produce more.

As a result, carbon prices are not an issue for industry, and this is why the whole scheme is ineffective at curbing emissions. This is set to change marginally, as a review of the FAR is ongoing, but things are not looking good for the scheme’s largest industrial sector: steel.

If you have a question, comment, or want to alert us about an upcoming advocacy opportunity, please don’t hesitate to reach out:
Feedback on the Draft of the CBAM Implementing Regulation Carbin Border Adjustement Mechanism

Flat Steel in the Free Allocation Regulation

Currently, there is no incentive to use more ferrous scrap in the manufacturing of flat steel products (a quarter of EU ETS industrial emissions), so EU plants use over 80% virgin ores, and EU scrapyards export 20m scrap each year. But the amended FAR, as proposed by the Commission, is not going to change this.

This is why Sandbag is proposing a fix to create a level playing field between the use of ferrous scrap and virgin ore in flat steel manufacturing. This was sent to the Climate Change Policy Expert Group but will require a lot of public support to convince the Commission to consider it.

Feedback on the Draft of the CBAM Implementing Regulation

The next key element for the future of the ETS, the Carbon Border Adjustment Mechanism (CBAM) is meant to replace free allocation and end the distortions and excess price volatility it creates. But the scheme, which entered into force on 1 October, will only start charging from 2026 and ramp up very gradually. If everything goes to plan, it will be fully in place in 2034, but that is a big “if”!

For this to happen, the scheme must avoid mass imports of products considered “low-carbon” due to poor emissions accounting methodologies. This is what we flagged within the Commission’s CBAM expert group and again in our response to the consultation on the Implementing Regulation on reporting obligations under article 35(7), as we found the approach to steel and aluminium products made from scrap too naive and prone to circumvention by importers.

As the only measure to replace free allocation, which can’t continue for much longer, a failure of the CBAM could seal the death of the EU ETS.

The European Hydrogen Bank Confirms a Blind Support Approach

On the 30th of August, the European Commission published the Terms & Conditions (T&C) for the pilot auction of the European Hydrogen Bank (EHB) scheduled for November 23, 2023. We were not impressed, especially as the Bank’s premium payments can cumulate with free allowances under the EU ETS, state aid compensation for indirect carbon costs, and a myriad of other subsidies, giving hydrogen an unfair competitive advantage compared to other viable technologies.

Why do we care? Over-subsidised hydrogen uses risks making them more competitive than technologies that would otherwise be viable. This is not only more costly for the taxpayer, but it may dramatically increase the demand for electricity, slowing down the displacement of fossil electricity by renewables. Ultimately, hydrogen could be the biggest threat to the EU’s success in decarbonising.
If you would like more information on any of these topics, or to speak with a member of the Sandbag team, please send us an e-mail.

Latest from our website

Fixing the Innovation Fixation

Joint blog with Carbon Market Watch25 May 2023 Sandbag's feedback to the EC25 May 2023 The EU’s Innovation Fund, launched in 2018, is the EU’s programme for funding cutting-edge low-carbon technologies. To be eligible, projects must be, according to the European Commission, highly innovative, cost-efficient, mature, scalable, and have a significant emission reduction potential. The Innovation Fund is financed using …

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From Process to Product: A Fix to the Allocation of Free Emission Permits to Industry

On 18 April 2023, Sandbag presented to the European Commission’s Expert Group on Climate Change Policy a proposal for reforming the granting of free emission permits to industry under the bloc’s carbon market. Our proposal aims to incentivise the switch to lower carbon production methods, which the current way of handing out free allowances does not.   What is free allocation? …

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EU Criteria for Green Hydrogen: How They Could Increase Relience on Thermal Power and Hijack the Energy Transition

On February 13th, the European Commission released two pieces of legislation to provide criteria defining renewable hydrogen products. The so-called Delegated Acts matter because they set out how to comply with other regulations under review which will force ships, aircraft and heavy industry to use a minimum content requirement of the fuel, such as the Renewable Energy Directive, REFuelEU Aviation …

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You can read all of our publications on our website here.

What we're reading


25 October 2023: Seventh meeting of the Expert Group on the Free Allocation Regulation

29 October: The Renewables Energy Directive will enter into force

End October 2023: Start of the public consultation on the Free Allocation Regulation

23 November 2023: Pilot Auction of the European Hydrogen Bank will open

End November 2023: End of the public consultation on the Free Allocation Regulation

6 December 2023: Eighth meeting of the Expert Group of the Free Allocation Regulation

End December 2023: Entry into force of the Free Allocation Regulation

Q4 2024: Implementing Acts on CBAM Application for authorisation, registry, accreditation of verifiers, and verification of embedded emissions

About Sandbag

Sandbag is a non-profit climate change think tank which uses data analysis to build evidence-based climate policy. We focus on EU policies such as the EU Emissions Trading Scheme and climate governance, and emissions reductions in industrial sectors.

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Matthew Henry on Unsplash

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