Allowance Overallocation and Windfall Profits:

Implications for Carbon Leakage

Anna Pearsonwww.sandbag.org.uk

Why Overallocation Matters Overallocation in Phase 2 means some sectors and

companies will be insulated from risk of ‘carbon leakage’ during Phase 3

Causes of overallocation (intended and unintended) Incorrect projections of emissions growth Impact of recession Member states protecting industry and jobs

But whatever the causes, the impacts are clear Phase 2 cap will mainly be achieved through purchase of surplus

permits and CERs = Limited absolute cuts made to emissions. Large carryover of permits and CERs impacts on Phase 3 Parallels to the AAU debate - many surplus permits are just hot air

generated by recession.

Industrial sector – overallocation trends

PLEASE NOTE, FIGURES ARE INITIAL AND DO NOT YET TAKE ACCOUNT OF WASTE GASES OR SCOPE CHANGE

Windfall ProfitsIron and Steel: > €4 billionCement: > €1.25 billionTop Ten Companies with most surplus: >€ 3 billion

But who pays?EU power consumers who pay for the costs of power company compliance.

But an uneven picture within sectors.

Bought by Power Companies for

compliance

Paid for by Power Consumers

Industrial Surplus PermitsSits

Within Sectors – Iron and SteelNB: Figures do not yet take account of waste gases

Within Sectors – Chemicals

Contrasting Company Positions

ThyssenKrupp Production actually rose in 2008, but still overallocated. 5.65 million surplus permits in 08, over 20 million by end of phase. And TK bought 6 million CER credits. Carryover could actually be over 40 million.

Voestalpine: Short of 1.3 million permits in 08 despite drop in output of 4.8%. Cost to Voestapline of compliance is €18.2 million in 2008, nearly €100 million by 2012.

Could there be carbon leakage within the ETS?

Not a level playing field for Phase 3 and leakage decision

Internal competition issues within the EU.

Conclusions

Integrity of Phase 3 targets and allocation decisions could be compromised by Phase 2 hangover.

Assets carried over need to be considered in leakage decision.

Is the Precautionary Principle needed? Once free permits are promised, control over pollution is effectively privatised.

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