Last week saw Sandbag present some of our latest research at a public hearingin Brussels organised by the Greens/European Free Alliance parliamentary parties.

The hearing was designed as a forum to air different views on the problem of so-called “carbon leakage”. Carbon leakage is shorthand for the concern that climate policies in Europe – especially the EU Emissions Trading Scheme – may disadvantage manufacturers here, and encourage operations to migrate abroad where the carbon intensity of production may be higher. The real concern underlying the issue however is job leakage.

For companies with industrial plant covered by the ETS, the threat of carbon leakage has become their major bargaining chip in lobbying the Commission for generous free allocations. Without free allocations, they argue, the price of carbon will push up the costs of production to a level where they cannot compete against foreign producers who do not face carbon costs. This, they suggest, will push production overseas resulting in more carbon pollution than Business-As-Usual operations here. But with emerging economies increasingly investing in newer, more efficient industrial plant, it is becoming questionable whether fugitive operations necessarily mean increased emissions globally.

Wednesday saw familiar dividing lines appear between industry, on one side, and Green MEPs and Environmental NGOs on the other: Industry lobbyists – by far the most represented group in the room – exaggerated the leakage threats and job losses, argued aggressively for free allocations, and forestalled moving to 30% 2020 targets until a more comprehensive global deal was reached. While we and others called for an end to excessive cosseting of industrial companies under the scheme, highlighted the economic opportunities and called for a rapid unilateral move to 30%.

Our chief input was to highlight how industry had not only been protected from potentially imaginary carbon leakage threats in Phase II but had, in fact, been competitively advantaged by Member States through excessive allocations of free carbon allowances. Our research showed that industrial sectors as a whole had accrued surpluses of some 248 million permits over 2008-2009, currently worth €3.7 billion, and were likely to grow to something like 529 million permits (worth €7.9 billion), by the end of the Phase. Following the progress of the ten most over-allocated companies from 2008, we find steel, iron and cement companies – supposedly most endangered by carbon leakage – are projected to accrue some 370 million million permits worth €5.5 billion by the end of 2012.

The existence of these surplus permits within the scheme represents a missed environmental opportunity to save CO2 equivalent to three years worth of emissions from these ten companies.

These carbon assets could be sold on to help artificially sustain these industries during the global downturn – a purpose they were never designed to fulfil – or used to buffer them against whatever Phase 3 carbon caps are set out for them in future.

The Steal Sector

If the large surpluses we’ve identified in the iron and steel sector begin to make the threat of damaged competitiveness seem implausible, research by CE Delft makes it look like a sham. Their research indicates that nearly all the opportunity costs of free allocations (i.e. their full value on the open market) were passed on to consumers between 2005 and 2008. So much for the competitiveness fears!

As a final outrage, research done by Climate Strategies suggests that the export tax China imposes on domestic steel manufacturers (principally as a means of maintaining affordable steel supplies for domestic use), equates to a carbon tax of €30-40/tonne against our current carbon price of €15/tonne.

Industry posturing

The industry mantra for the day was “free allocation is not a free lunch”, though our work and that of CE Delft clearly tell the opposite story.

An unexpected plea from Business Europe was that we should not “choke the budding global carbon market”, by restricting the quality or quantity of offsets entering the scheme from outside. This was a remarkable statement to make in a discussion about carbon leakage – as offset projects include energy efficiency subsidies to foreign competitors in exposed sectors. When taken to task on this by the Climate Action Network, Business Europe deflected the conversation on to intellectual property concerns.

Perhaps the most concerning element of the day was the consistent undermining of the evidence against risks of leakage by a representative of the Directorate General for Enterprise who seemed to consider methodological transparency as evidence of a studies’ weakness, and took any level of conscientious admission of uncertainty as grounds to dismiss evidence. The irony in this is that most of the uncertainties are a result of the deep opacity of industries’ operations within the scheme.

DG Enterprise could help to resolve some of these problems if it were to release more information relating to their assessments of sectors exposed to ‘carbon leakage’, the methodology for which was itself riddled with weaknesses. They could for example publish the installations in the 164 subsectors DG Enterprise has concluded are at risk of carbon leakage so that we can make a proper assessment of the surpluses accruing in these sectors. They could also undertake more research into the impact of the flow of offsetting finance into competing sectors in developing countries. Sadly, for now they seem to be more interested in echoing the concerns of certain vocal industry lobby groups. If it wants to deliver a clean, efficient and competitive 21st century industry for Europe, DG Enterprise must start looking past the short term lobbying concerns of incumbents and pursue a bolder vision.