Buckle Up! Tighten the cap and avoid the carbon crash

The report finds that the EU ETS is significantly oversupplied, with industrial sectors accumulating large surpluses of permits while the power sector faces a shortfall. This imbalance, exacerbated by the 2008 recession, threatens to weaken the Phase 3 cap by approximately 1.9Gt. The author highlights abuses in international offsetting, where surplus-holding installations use offsets for profit (arbitrage) or to subsidize foreign competitors. To rectify this, the report recommends a 1.7Gt set-aside of Phase 3 permits, a steeper annual cap reduction of 2.4% by 2016, and increased transparency in reporting installation ownership and waste gas transfers.

• The EU ETS is experiencing significant oversupply, with 77% of total installations currently in surplus. The net surplus in Phase 2 (2008-2010) is approximately 200Mt, but this is masked by a 530Mt shortfall in the power sector, which has effectively cross-subsidized industry to the tune of €2.9 billion.
• Industrial surpluses from Phase 2 are projected to reach 855Mt by the end of 2012. Because these can be banked, 672Mt will likely carry forward into Phase 3. Additionally, these surpluses inflate the Phase 3 baseline, adding another 1.2 billion permits, resulting in a total estimated oversupply of 1.9Gt for the 2013-2020 period.
• The iron and steel and cement sectors have accumulated the largest industrial surpluses, totaling 308 million permits (70% of the total industrial surplus) between 2008 and 2010. The steel sector specifically has accumulated 165Mt and the cement sector 143Mt, worth €2.6 billion and €2.3 billion respectively.
• The steel industry uses 'waste gas transfers' as a justification to downplay its surpluses, claiming that a large portion of its allocation is transferred to combustion installations. However, the report argues that the industry has been non-transparent with specific figures and that the methodology used by companies like Tata and ThyssenKrupp to calculate these transfers is overly flattering to the producers.
• International offsetting provisions are being abused for 'offset arbitrage.' Approximately 28% of active installations (2,912 companies) surrendered 157Mt of offsets despite holding a surplus of free allocations, pocketing €628 million by releasing more valuable carbon permits for sale. Furthermore, 254Mt of offsets have subsidized industrial competitors in emerging economies.
• Sandbag recommends a set-aside of 1.7Gt from the Phase 3 budget by 2013. This consists of 672Mt to correct for Phase 2 carryover and 1Gt to correct for the inflated Phase 3 baseline caused by industrial oversupply.
• The report proposes that the EU ETS Directive be reopened by 2015 to implement a steeper annual cap reduction of 2.4% (up from 1.74%) to align with the 2050 Low Carbon Roadmap, which would effectively cancel the proposed 1.7Gt set-aside by 2027.
• To prevent future price crashes and oversupply, the report recommends creating an ongoing cancellation mechanism (Article 29b) to permanently lower permit supply under specific conditions, or introducing a reserve price for auctioned permits to ensure a minimum price signal for investors.

APA

Morris, D., Craston, P., & Byrne, M. (2011). Buckle Up! Tighten the cap and avoid the carbon crash. Ember. https://ember-energy.org/app/uploads/2020/03/Sandbag_2011-Buckle-Up.pdf

Chicago

Morris, Damien, Patrick Craston, and Matthew Byrne. Buckle Up! Tighten the cap and avoid the carbon crash. Ember, 2011. https://ember-energy.org/app/uploads/2020/03/Sandbag_2011-Buckle-Up.pdf.

Wikipedia

{{cite report |last1=Morris |first1=Damien |last2=Craston |first2=Patrick |last3=Byrne |first3=Matthew |title=Buckle Up! Tighten the cap and avoid the carbon crash |publisher=Ember |date=July 2011 |url=https://ember-energy.org/app/uploads/2020/03/Sandbag_2011-Buckle-Up.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{morris2011buckle, author = {Morris, Damien and Craston, Patrick and Byrne, Matthew}, title = {{Buckle Up! Tighten the cap and avoid the carbon crash}}, institution = {Ember}, year = {2011}, month = jul, url = {https://ember-energy.org/app/uploads/2020/03/Sandbag_2011-Buckle-Up.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }