Industrial overallocation in the original caps
Additional scarcity envisaged in 2008 compared with today
Allowances Sandbag argues should be withdrawn from Phase 3 auctions
Losing the lead is Sandbag’s 4th annual report on the Environmental Outlook for the EU ETS – following on from ETS S.O.S. (2009), Cap or Trap? (2010) and Buckle Up! (2011). This report again uses latest emissions data to examine how the ETS is performing on the ground and makes recommendations for urgent reforms. In particular, it highlights that existing proposals to reform the scheme inadequately account for the change in demand for allowances since the caps were last set (2.2Gt), and the effects of industrial overallocation on the cap (0.9Gt). This report also updates our list of Carbon Fatcat companies accruing the largest surpluses of free allowances within the scheme.
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ETS caps are left with 2.2 billion tonnes less demand than was anticipated
We recommend this 2.2Gt in European Union Allowances be removed to restore the original scarcity envisaged for the ETS cap. However, a full correction to the cap would require withdrawing 3.1Gt of allowances from the scheme.
There remains a serious disconnect between the crisis facing the ETS and the solutions tabled to rescue it. The scheme was intended to deliver a significant shortage of allowances against business-as-usual emissions and thereby oblige ETS installations to pollute less. But the debate has focussed on the surplus allowances sitting above the revised emissions projections rather than restoring the levels of scarcity originally envisaged.
Even those stakeholders who have argued for a return to the intended levels of scarcity have been handicapped by a dearth of analysis and consistently invoked inadequate quantities to achieve their stated aim.
The business-as-usual emissions baseline against which both the EU climate target and the ETS caps were set are totally obsolete. Expectations of Europe’s GDP growth out to 2020 are down by a third since the climate package was agreed. This has left the ETS caps with 2.2 billion tonnes less demand than was anticipated.
We recommend this 2.2Gt in European Union Allowances be removed to restore the original scarcity envisaged for the ETS cap. This will also help restore domestic effort proportional with the level of expected offshore abatement in the offsetting provisions.
We identify a further 900 million excess allowances in the scheme against the original emissions forecasts, resulting from industrial overallocation. A full correction to the cap would require withdrawing 3.1Gt of allowances from the scheme.
We note that 78% of the surplus EUAs in the ETS to date can be attributed to just ten steel and cement companies, who have confirmed revenues of at least €1.8 billion from the sale of allowances.
Finally, we note that emissions trading schemes carry a structural risk of cancelling out emissions reductions caused by other policies and events, and it is necessary to install ongoing provisions to account for these to prevent emissions trading schemes from becoming an environmental hindrance.