What's the deal with the free permits?

Over half of the 2.2 billion annually distributed CO2 emission permits are allocated for free by the EU. The other half the industry must buy at auction. The free allocation has the objective to protect the industry against competitors outside the scope of the system. There are concerns about displacement of industrial activities, since the industry claims that it will become too expensive for them to run their production in Europe. This transfer of company’s counties with less strict climate policies is referred to as ‘carbon leakage’.

The current approach for avoiding activity displacement is to allocate free permits to sectors considered to be at risk of such carbon leakage displacement. The reasoning is clear, but in reality no evidence has been found for carbon leakage. Even worse, companies who experience no, or little, competitive disadvantages receive lots of free CO2 emission permits. Think of the aviation sector; how could they relocate outside of the EU, but still provide the service of flying between Amsterdam and Rome? 

The Netherlands missed out on more than 3 million potential revenues due to free allocation. Money that would otherwise have been used for sustainability efforts and climate action. 

An additional pitfall of free allocation is that industries are making a profit from the system: they receive free permits that have a market value, leading to increased revenues since they can sell these permits on the market. It leaves some highly emitting sectors with little or no carbon price incentive to decarbonise. This must stop.

Reforms

In july 2021, the European Comission proposed a revision of the EU ETS. The propose to phase out free emissions for the aviation sector by 2027 and for other sectors by 2035. This proposal is by far not ambitious enough. The EU continues to allocate free emission right to polluting industries, even when they will be protected by the new Carbon Border Adjustment Mechanism. And though the proposal included a provision that industries need to decrease their emissions through existing innovations (if available), they can only lose up to 25% of their free allowances when they fail to do so. This is not sufficient to create a real incentive. Therefore, Carbon Killer campaigns to end free allocation as soon as possible. 

Carbonkiller

Emission trading

Solutions