Paying the polluters: EU emissions trading and the new corporate electricity subsidies

Industry lobbying on EU climate policy looks set to secure further subsidies for energy-intensive industries through the reform of State Aid, according to a new report, Paying the Polluters: EU emissions trading and the new corporate electricity subsidies, published by Corporate Europe Observatory and Carbon Trade Watch. The report shows how the Commission's proposals have opened the door to millions of euros of subsidies to help some of the biggest polluters pay their energy bills.

Read the full report here.

Wikileaks and EU climate targets

A cable detailing a 2008 spat between the EU and US on climate change targets sheds light on the EU’s lack of ambition.

In a frank exchange on March 7, U.S. and European principals reviewed work on climate change under the Major Economies and UNFCCC Processes. U.S. principals secured EU Environment Commissioner Dimas' admission that current EU proposals will permit some EU Member States to record absolute increases in emissions by 2020.

Dimas conceded that “some EU Member States will be permitted under the EU's proposals to record an absolute increase in emissions by 2020.”

Jim Connaughton, Chairman of the White House Council on Environmental Quality at the time, further questioned the EU’s achievements in relation to its Kyoto targets:

for Europe, 1990 as a reference year incorporates the early 1990s economic collapse of eastern Europe, which no policymaker would recommend be repeated; the UK's decision to move away from coal to natural gas, long before climate change was a policy issue; and the EU's use of diesel fuel, at the expense of air quality and human health.

European Commission “Scaling up climate finance”: what does it actually mean?

The European Commission says $100 billion a year by 2020 for “climate funding” in developing countries is “challenging but feasible.” But read behind the press release, and what is actually being proposed shifts even further away from the idea that climate finance should form part of an obligation (or “debt”) incurred, alongside other industrialised nations, for playing a disproportionate role in causing climate change in the first place.

What follows are some notes on a new European Commission document prepared as a follow up on the UN High Level Panel on Climate Change Financing (AGF). The report was commissioned by ECOFIN (the Economic and Financial Affairs Council, which is the meeting of EU finance ministers) in December 2010.

Like most Staff Working Documents, its 46 pages are a dry and technical affair, but unlike most such documents it contains some interesting clues as to the direction of the Commission's thinking.

Carbon markets are central to the EU's approach, as are a broad range of other “private financial flows”. Public climate finance is defined in increasingly blurry ways, including promoting the EIB's role, double-counting aid flows, and blurring the boundary between public and private financing (eg. suggesting that more public sector equity be provided for private projects – in essence, because the banks aren't lending so much as a result of the economic crisis).

What are “private financial flows”?

* The general orientation of the document is that “Private financial flows will depend largely on developing countries' capability to create a general business environment which is attractive for domestic and international investment. ” (p.10) However, it is noted that the economic crisis has “severely limited access to private financing worldwide.” (p.45). It suggests, in this context, that MDBs and other IFIs act as “market maker” (p.45), in which the EU could be a partner through ”measures such as co-investments, risk sharing mechanisms, fee incentives, sanction mechanisms, etc. ”

* The boundary between public and private finance is becoming very blurred. For example, the document notes “The blending of grants and loans as well as equity and quasi-equity constitute innovative mechanisms to enhance support to EU external priorities and to multiply the impact of EU external assistance (p.43)

* A number of “innovative” instruments are proposed to enhance private financial flows. These include : “Instruments to improve the risk-return profile include the provision of guarantees, technical assistance or interest rate subsidies to support the issuance of debt for climate projects. Public-Private Partnerships (PPPs) can spread the costs and risks of financing of public goods over the lifetime of the asset which can considerably alleviate the short to medium-term pressure on public budgets. Using public funds to inject equity capital into companies or projects can be another mechanism to mobilise private investment. Public support for the use of market-based insurance schemes covering natural disasters can leverage sizeable amounts of private finance for adaptation. Other examples of innovative mechanisms that could raise private finance for climate actions are Advance Market Commitments (AMCs), tax discounts, access to finance, or standards of corporate social responsibility. ” (p.12) (see also p.39)

Public finance

* The document offers an “indicative table of financial contributions from Annex I states” (p.19) and suggests a central role (esp. in adaptation) could be played by the Green Climate Fund, which it sees as “likely to become bigger than the existing funds under the Financial Mechanism of the Convention ” (p.19)

* On adaptation, it is noted that“donor support for microfinance institutions (MFIs) could also be regarded as climate finance to some extent, ” (p.39)

Carbon markets

* The documents recommendations include the (predictable) suggestion that that the EU “work with other developed countries interested in setting up cap-and-trade systems, ... make progress on the reform of the Clean Development Mechanism, and ... promote a sectoral crediting mechanism; ”

* More interestingly, “Commission analysis shows that with current pledges, allowing the full banking of the Assigned Amount Unit surplus and choosing the Kyoto Protocol target as a starting level for the emission reduction paths for the period 2013-2020 would result in no demand for international credits additional to what has already been enabled.” (p.34) This begs a significant question as to what the use of the EU's proposed market mechanisms would be? In fact, it seems to signal a potential lack of demand that would undermine prices. As such, figures for the proposed “financial flows” that the EU attaches to such mechanisms should be treated with extreme caution, and may leave a large climate financing hole.

* For those with an interest in carbon markets, these projections are also useful to bear in mind (and offer one of the clearer projections relating to demand for sectors outside the EU ETS, ie. those covered by “effort sharing” Directive: “Current EU ETS legislation allows for carbon offsets of about 1.6- 1.7 Gt of CO2 in the period 2008-2020 (i.e. about 130 Mt of CO2 per year). Additional demand for credits will come from the sectors outside the EU ETS amounting up to approximately 700 Mt over the period of 2013-2020, i.e. roughly 88 Mt of CO2 per year until 2020. At the current price for CDM credits of some EUR 13 per tonne of CO2, the demand by the EU could generate roughly EUR 3 billion of financial flows to developing countries per year, not taking into account additional flows triggered by investments underlying CDM projects.” (p.35). Here as elsewhere (p.10 of the report), figures on CDM “investment” treat investment as the same thing as the cost of carbon credits sold (ie. these figures don't try to account for the large sums skimmed off by project developers, etc. ... and other financial transfers – eg. returns on equity borrowed to finance projects; intra-company financial flows from South to North).

MRV (measuring emissions)

* On MRV, it notes that “A new major challenge in the context of long-term climate finance will be the monitoring and accounting of private flows.” (p.20)

Double-counting aid flows

* Double-counting aid flows now seems to be normal Commission practice. Figures on existing climate finance are said to include allocations from the European Development Fund (EDF) (p.20), as well as a proportion of the EU's existing 2007-2013 budget that was allocated to the Instrument for Development Cooperation (DCI). (p.21), including subsidiary thematic programmes such as "Environment and sustainable management of natural resources including energy" (ENRTP) with a total amount of approximately EUR 1.1 billion.” The document notes that “The ENRTP covers the additional budget allocation granted for fast-start climate change funding and the allocation for the Global Climate Change Alliance (GCCA). ” The EU's climate finance figures also seem to include money from “the Neighbourhood Investment Facility (NIF) [which] has approved more than EUR 100 million of grants for climate related projects” since 2008. (p.43)

New EU carbon tax

* The EU is seriously considering new carbon taxes. “The Commission intends to come forward, during the second quarter of 2011, with a proposal for a revision of the Energy Taxation Directive (ETD) to bring it more closely in line with the EU's energy and climate change objectives. The proposal will aim at, on the one hand, integrating an explicitly CO2-related element into the energy taxation system which would be applicable outside the EU ETS and, on the other hand, putting the remaining part of energy taxation on a neutral basis by linking it to the energy content of the products subject to taxation. In doing so, it will ensure consistent treatment of energy sources within the ETD in order to provide a genuine level playing field between energy consumers independent of the energy source used. Moreover, it will provide an adapted framework for the taxation of renewable energies and provide a framework for the use of CO2 taxation to complement the carbon price signal established by the ETS while avoiding overlaps between the two instruments. ” (p.31) More on this is also reported here.

Privatising the commons

The document suggests that “ETS auctions of allowances for greenhouse gas emission sources in energy and industry could deliver revenues of more than EUR 20 billion per year by 2020. According to the ETS Directive, Member States should spend at least half of these amounts on activities related to climate change, energy and low-emission transport, including in developing countries ” (p.8). It should be noted that(1) these funds are not actually earmarked, and many EU Member States would resist such a move; (2) in putting a value on auctioned permits, the EU is creating property rights from pollution which are drawn from a global carbon space (that the EU has already over-used its share of).

Sarko's Club Med

A new Union for the Mediterranean was officially launched in Paris last Sunday, with French President Nicholas Sarkozy claiming it would help bring about peace and stability.

Actually, he was rather more romantic: 'The purpose of the Mediterranean summit, of this union for the Mediterranean, is that people learn to love each other in the Mediterranean region instead of keeping on hating each other, and fighting each other.'

Sarko's love-in was attended by Palestinian President Mahmoud Abbas and Israeli Prime Minister Ehud Olmert, who added to their holiday snaps by posing together, as well as Syrian leader, Bashar al-Assad. This was the first meeting he'd had with Olmert, although he quietly slipped out of the room before having to listen to his Israeli counterpart.

Despite the hype, though the new club of nations is far from a new proposal. In fact, the Union for the Mediterranean is the latest of several attempts to formalize relations between the European Union and its neighbours to the South and East.

It was devised by Sarkozy as a key pillar of the French EU presidency, which runs until the end of the year.

The new Union overlaps with an earlier EU proposal for cooperation in the Mediterranean region, officially called the 'Barcelona Process'.

But suspicions are widespread to French motives for proposing the new club of nations.

Turkey has long expressed its reservations about the plan – seeing moves towards a Union of the Mediterranean as a manouvre by Sarkozy to block its entry into the European Union (and with good reason).

The Libyan leader Muammar Qaddafi boycotted the summit, claiming that the new Union was a ‘neo-colonialist’ attempt to reassert French influence in North Africa.

Beyond this posturing, however, the move towards a new Mediterranean Union is driven more by economic concerns than by grand intentions to build peace in the region.

Its formation has sparked up internal rivalry within the European Union, with German Chancellor Angela Merkel seeing it as an attempt by France designed mainly to advance its own economic and political interests in North Africa.

In response, Merkel won some concessions. The European Commission, which has so far spent 16 billion euros since 1995 on the ‘Barcelona process’ will limit its funding for the new Mediterranean union to 7.5 billion euros until 2013.

This package was agreed alongside a pledge to dedicate more funding to the EU’s eastern relationships – in which Germany has a stronger interest. Germany is the largest contributor to the EU budget.

Both policies, in fact, overlap with a more broad-ranging European Union Neighbourhood Policy to promote free trade and control migration into the 27-member bloc.

As part of this strategy the European Union is building detention centres to lock up migrants in Libya – as part of a cooperation agreement that critics have called a ‘Fortress Europe’ strategy.

The EU is also pursuing a series of bilateral trade agreements with Africa, aimed at opening up markets for European-based corporations. Trade between the EU and its Mediterranean neighbours amounted to 120 billion euros in 2006, with EU-based multinational companies the main beneficiaries.

In fact, the most immediate objective effect of the new Mediterranean union is the promotion of a series of investment projects – in water management, sea purification and nuclear energy – which are most likely to help French companies acquire lucrative new contracts in the region. And that's an idea that Sarkozy truly loves.

When the CAP doesn't fit

The European Commission presented plans to shake up its Common Agricultural Policy, its multi-billion dollar system of farm subsidies, last Tuesday.

But the new proposals do little to fundamentally reform the system, despite pressure from rising global food prices, and growing environmental concerns about large-scale industrial agriculture.
More than 40 per cent of the European Union’s 155 billion dollar annual budget is spent on farm subsidies.

Currently, 15 per cent of farmers receive 85 per cent of the direct farm subsidies in the EU’s 27 member states.

Under the Commission’s new proposals, the EU would cut the link between its subsidies and the amount of food that is actually produced on the land. It claims that this will help to protect the environment and promote traditional family farms.

But the Confederation Paysanne Europeanne, a Europe-wide network representing small farmers, also claimed that the new measures do not go far enough. It argues that market de-regulation pushed by the EU has undermined food sovereignty globally.

The EU’s new proposals would also abolish set-aside, the practice of leaving 10 per cent of arable land fallow.

This measure is supported by farmers’ representatives, but was strongly criticised by environmentalists – who claim that the fallow land is a lifeline for the continent’s birdlife.

Reforms to the Common Agricultural Policy have long been demanded by Southern governments and development organisations, which have criticized the European Union for forcing developing countries to open their markets to heavily subsidized European agricultural produce. This is said to undermine the development of sustainable agriculture in poor countries.

Yet with the rise in food prices globally, the gap between the market price and the EU prices has narrowed; and with that, attention has turned to the role of other EU measures, such as its biofuel subsidies for the production of fuel from crops, in undermining sustainable agriculture.

EU ETS: the emissions trading handouts continue

Those of you interested in the EU's Emissions Trading Scheme (and frankly, with a title like that, how could you not be?) might be interested to learn that the EU's claims that it will start auctioning its 'permits to pollute' are dubious, at best. Ok, if you haven't got the faintest what I'm on about, click here .

Despite the EU's claim that auctioning will become ‘the basic principle for allocation’ under the new ETS after 2012, the European Commission's draft directive sets up so many exceptions to this rule that it is hard to see what happened to the rule at all:

* First, it names the risk of ‘carbon leakage’ – 'ie. relocation of greenhouse gas emitting activities from the EU to third countries and thereby increasing global emissions.' as a result of its climate policy. This is used to justify the fact that most polluting sectors of the economy will continue to receive free permits to pollute; and that in others the ‘transition’ from free permits to auctioned ones is delayed for several years - despite the acknowledged urgency of the climate crisis.
* Second, the terms of this transition from a system of 'free' to 'auctioned' permits are lax. There will still be free allocation of 80% of allowances in 2013, decreasing year on year ‘by equal amounts’ until ‘no free allocation in 2020’. In other words, the majority of permits to pollute will still be given away until the middle of the next decade.
* Third, it is also proposed that a Commission study will identify by 30 June 2010 which sectors are affected by carbon leakage, and potentially allow these energy-intensive industries to receive ‘up to 100% of allowances free of charge’. This will be re-assessed every three years, so polluters who fail in their lobbying first time out can have several more bites.

To summarise what's happening here (in case you've not read the whole EU Draft Directive): the shift from a system of free permits to allowances is delayed, with the potential that it won’t happen at all. Where allocations are given away, windfall profits for the EU’s most polluting companies will continue. Where they are auctioned, windfall profits for the EU can be expected. Only 20% of that money will be ring-fenced for reinvestment in renewables or for contributing to funding for the poorer electricity users and countries… from whom the property rights to this ‘carbon’ were stolen in the first place!

It strikes me that there is a genuine problem that is being addressed here – ie. the EU can set rules on pollution domestically, but if these are not matched elsewhere in the world then factories could fly to those places where there are fewer environmental restrictions. However, (1) threats of this nature tend to be overstated as a lobbying ploy by industry to extract favourable terms from the EU: the real costs of relocation and the infrastructure needed to maintain certain industrial locations are high and may outweigh what could, in practice, only be a short-term economic benefit of relocating to avoid EU caps. A far more important point is (2) that this is a problem of the EU’s own making, since it is aggressively pursuing free trade policies (now rebranded as ‘global Europe’) that encourage a race to the bottom to undermine standards; (3) the EU's caveat to all this - namely, that it must also abide by WTO rules - disavows the EU’s role in making those rules in the first place. If you don’t worship at the alter of free trade, by contrast, this is a non-issue: there are various was of regulating to ensure emissions reductions without having to make concessions to insure against flighty capital.

And finally, in case you were ever stuck on how to rebrand failure as success, try taking some lessons from the EU:

The failed 2005 to 2007 ETS is now referred to as the “first ‘learning-by-doing’” phase. This phase ‘successfully established free trade of emission allowances across the EU, set up the necessary infrastructure… developed into the world’s largest single carbon market…’ etc….. hang on, there’s something missing from this list… successfully established a market, right, but what about actually achieving any emissions reductions? … “However, the environmental outcome of the 1st phase of the EU ETS could have been more significant [you don’t say…] but was limited due to excessive allocation of allowances in some Member States and some sectors, which must mainly be attributed to reliance on projections and a lack of verified emission data.” Ah, I see, nothing to do with excessive corporate lobbying meaning that the caps on this ‘cap and trade’ scheme were set so high that they didn’t actually cap anything…