“Dynamic allocation” – an industry model for windfall profits from free emission allowances at the expense of taxpayers

The document critiques the proposal for 'dynamic allocation' of free emission allowances in the EU ETS post-2020, which would remove caps on free permits for industrial sectors. It argues this model enables windfall profits, reduces incentives for innovation, and shifts a significant financial burden to taxpayers. The author recommends full auctioning of allowances as the default method to uphold the polluter-pays principle and suggests using auctioning revenues to fund an industrial innovation fund for low-carbon technologies.

• Current free allocation of emission allowances to industrial sectors at risk of carbon leakage has led to over-allocation and windfall profits. Between 2005 and 2008, carbon-intensive industries gained approximately 14 billion euros in windfall profits, representing a significant transfer of funds from taxpayers to industry. Specifically, from 2008 to 2011, the steel sector accumulated a surplus of over 300 million CO2 excess allowances, and the cement sector received 200 million more than required.
• The 'dynamic allocation' model proposed by industry (including papers by BASF and Ecofys) for the post-2020 period would remove the cap on free allowances based on actual production. This would reduce the incentive for industry to modernize or reduce emissions compared to other economic sectors. Under the Ecofys proposal, industry subsidies would increase by approximately 130 billion euros between 2021 and 2030, as industry would receive nearly 5 billion additional free emission allowances.
• The author recommends that full auctioning of emission allowances should replace free allocation for all sectors after 2020 to ensure the polluter-pays principle is upheld and to reward low-carbon investments. To support the transition, a portion of the EU ETS auctioning revenues should be used to create an industrial innovation fund for breakthrough technologies, such as coke-free steel or magnesium-based cement production.

APA

Carbon Market Watch (2014). “Dynamic allocation” – an industry model for windfall profits from free emission allowances at the expense of taxpayers. https://carbonmarketwatch.org/wp-content/uploads/2014/09/carbon-leakage-rebuttal_WEB_final.pdf

Chicago

Carbon Market Watch. “Dynamic allocation” – an industry model for windfall profits from free emission allowances at the expense of taxpayers. 2014. https://carbonmarketwatch.org/wp-content/uploads/2014/09/carbon-leakage-rebuttal_WEB_final.pdf.

Wikipedia

{{cite report |author=Carbon Market Watch |title=“Dynamic allocation” – an industry model for windfall profits from free emission allowances at the expense of taxpayers |date=September 2014 |url=https://carbonmarketwatch.org/wp-content/uploads/2014/09/carbon-leakage-rebuttal_WEB_final.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{carbonmarketwatch2014dynamic, author = {{Carbon Market Watch}}, title = {{“Dynamic allocation” – an industry model for windfall profits from free emission allowances at the expense of taxpayers}}, institution = {Carbon Market Watch}, year = {2014}, month = sep, url = {https://carbonmarketwatch.org/wp-content/uploads/2014/09/carbon-leakage-rebuttal_WEB_final.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }