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Will net zero survive its policies? - Sandbag newsletter
Read on for a detailed analysis of what these landmark agreements mean for the mid-term implementation of the Fit For 55 Package as well as a list with handpicked articles to read, upcoming events to look out for, and a job opportunity.
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If you have a question, comment, or want to alert us about an upcoming advocacy opportunity, please don’t hesitate to reach out.
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Lost opportunity of carbon market reform leaves a lot to fix in ancillary laws
In December 2022, the European Commission, Council and Parliament reached a provisional agreement on reforming the EU Emissions Trading Scheme (ETS) and introducing a Carbon Border Adjustment Mechanism (CBAM). The ETS now aims for a 62% emission reduction target by 2030 compared to 2005, up from 43% before. The CBAM will partly replace the free allocation of emissions permits to polluters covered by the ETS.
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These agreements are now in the process of being formally approved by the Parliament and the Council.
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Although these two things sound great, the small print is much gloomier, as explained here.
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Carbon Border Adjustment Mechanism - mind the scrap!
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The idea of replacing the free allocation of emissions permits with a Carbon Border Adjustment Mechanism (CBAM) is commendable. However, implementation methodologies might create risks for the levy to be avoided by importers, which may endanger the whole scheme. As a member of DG TAXUD’s Expert Group on the CBAM, Sandbag submitted its concerns regarding the treatment of metal scrap.
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Free allocation: correcting incentives
A carbon market is only useful if it drives down emissions at the lowest possible cost. This is what the EU ETS has so far failed to do, mostly because of the way free permits are handed to industry plants based on the processes they use. Instead, rather than incentivising lower emissions, the carbon price is marred with volatility and a lack of industry response to even its highest levels.
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A review of the free allocation regulation (FAR) is just starting, and Sandbag will fight to improve it, starting with a presentation to DG CLIMA’s Expert Group on Climate Change Policy of our proposal to make free allocation more effective on 18 April.
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Innovation financing: spend smarter!
At the same time as giving free emission permits to the most polluting industrial plants, the EU has set a goal to spend over €50 billion from EUETS revenues on “innovative” projects. But the Innovation Fund’s granting strategy is reckless and costly and creates unfair competition, with entire economic sectors ineligible for its support, not least circularity. As part of the Innovation Fund Expert Group, Sandbag will also fight to improve the regulation on the Innovation Fund.
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The recently announced Net Zero Industry Act facilitates support for a number of low-carbon technologies but bizarrely only sets deployment objectives for carbon capture and storage (CSS), which will incentivise the use of more fossil fuels just as Europe needs to use less gas following Ukraine’s invasion by Russia.
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Hydrogen: green may be bad
Alongside innovation, Europe is betting big on hydrogen. The Renewable Energy Directive and two other regulations are about to set goals for the use of “green” hydrogen, called RFNBO. But we found out that the criteria set to define RFNBOs are likely to drive emissions up, not down.
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This is all the more worrying given that about €15 billion Member State money has been pledged towards projects around hydrogen and the European Commission has just announced the creation of a Hydrogen Bank, none of which have set criteria on the carbon footprint of the hydrogen produced.
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The biggest losers: circularity, the climate - and most of us
The legislation from December sets bold ambition levels until 2030 but sets incentives that go against this ambition. This is likely to result in a decade-long dysfunction of the carbon market which will fail to result in actual decarbonisation despite sky-high carbon and electricity prices.
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Hang on... does the carbon market’s cap not ensure that targets are met anyway? Well, actually no! Thanks to a number of loopholes not being removed in this reform, the emission cap can be exceeded, and by a wide margin – watch this space for our updated simulator due very soon.
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So the carbon market reform is set for feeding more resentment against a system that will end up benefiting only a few private interests at the expense of the majority, citizens and industry alike – not least the circular economy which was barely mentioned in the agreed text.
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Meanwhile, the legislation over-relies on “innovative” technologies and a hydrogen economy which would drain Europe’s already insufficient low-carbon electricity and drive emissions up. What will happen at the end of this decade, after all the billions spent have just locked in more carbon-hungry technologies and emissions are clearly off-track for net zero? Will we want to spend even more to keep the 2050 objective alive, or will political forces agree to drop the ambition?
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But... the game is not over yet!
This worrying direction taken by the EU’s carbon market reform still leaves a few opportunities to control the damage and fix some problems. Many implementation decisions still need to be made on free allocation benchmarks, CBAM, State aid, clean hydrogen and the Innovation Fund, and getting those right could still make a significant difference.
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In 2023, more legislative decisions are coming up regarding the EU carbon border levy, the allocation of free emission permits to industrial plants, the definition of “green” hydrogen, innovation subsidies and more. As private interests try and push their own agendas in Brussels, we will continue to fight for ambitious policy changes that are based on prioritising the common good, not industry lobbying. Sandbag’s research, analysis and data tools are some of the very few trusted resources consulted by decision-makers.
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In order to succeed, we need your help.
Nearly all of Sandbag's funding comes from grants and donations. You can help continue our work with a contribution, no matter how small, on our donations page. Donations are tax deductible and a receipt can be provided upon request.
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In order to succeed, we need your help.
Nearly all of Sandbag's funding comes from grants and donations. You can help continue our work with a contribution, no matter how small, on our donations page. Donations are tax deductible and a receipt can be provided upon request.
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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.
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What we're reading
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Upcoming
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17 APRIL. ETS and CBAM to be formally adopted in the EP plenary.
18 APRIL. Second meeting of the Expert Group on Climate Change Policy.
18-19 APRIL. Informal meeting of environment ministers.
UNTIL 23 MAY: Feedback period on Electricity Market Design.
UNTIL 29 MAY: Feedback period on the Net Zero Industry Act.
UNTIL 7 JUNE. Public consultation on the evaluation of the EU Ship Recycling Regulation.
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Join our team!
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About Sandbag
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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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Want to support Sandbag in the fight against climate change?
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Following the revision of the EU Emissions Trading System (ETS) Directive in April 2023, the European Commission was mandated to review the Free Allocation Regulation, which establishes the methodology that calculates the number of free emission allowances for sectors covered by the EU ETS. The revised ETS Directive, approved by the European Parliament and the European Council, stated that the …
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The Commission has recently published the Terms & Conditions (T&C) for the pilot auction of the European Hydrogen Bank (EHB) taking place on the 23rd of November 2023, in an attempt to meet the ambitious target set in the REPowerEU plan of 10Mt domestically produced green hydrogen. As previously announced, the Commission has decided to extend the recently designed competitive …
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We welcome the Commission's draft of the CBAM implementing regulation concerning the reporting obligations and provisional methodology for calculating embedded emissions in CBAM goods. However, we have concerns regarding the accounting and monitoring rules applied to metal scrap. We are worried that they may open the door to carbon leakage for aluminium and steel production, i.e. the metals currently covered …
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You can read all of our publications on our website here.
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