Search Climate Insights Directory

The document analyzes how free emission allowances under the EU ETS led to up to 50 billion euros in windfall profits for energy-intensive industries between 2008 and 2019. It challenges the 'carbon leakage' justification for these allowances, noting a lack of evidence for industrial relocation. The author recommends transitioning to full auctioning of permits and utilizing the resulting revenues for climate innovation and a just transition.

Between 2008 and 2019, fifteen CO2-intensive industrial sectors in nineteen EU countries earned estimated additional profits between €30 billion and over €50 billion from the EU ETS. These profits were derived from three primary sources: the overallocation of free emission allowances, the use of cheaper international credits (CERs/ERUs) for compliance, and the passing through of opportunity costs of free allowances into product prices. The iron and steel sector was the largest beneficiary, with profits ranging from €11.9 billion to €16.1 billion. In contrast, the aviation sector experienced a net loss of €151.2 million due to the need to purchase allowances. The report argues that free allocation may no longer be fit for purpose and recommends increasing the share of auctioning combined with targeted investment subsidies or a Carbon Border Adjustment Mechanism (CBAM) to reduce windfall profits and encourage decarbonization.

Carbon Market Watch argues that the EU ETS has failed to significantly reduce industrial emissions since 2012 due to free pollution permits and exemptions. To achieve climate neutrality by 2040, the briefing recommends increasing the Linear Reduction Factor (LRF), strengthening the Market Stability Reserve (MSR), ending free allowance allocations for industry and aviation, and earmarking 100% of auctioning revenues for climate action and innovation.

The briefing proposes a federal low-carbon product standard for the U.S. cement and steel sectors to drive decarbonization. It suggests setting declining emissions intensity benchmarks and allowing the trading of emissions credits among producers and importers. For cement, the author recommends regulating the cement itself rather than concrete for administrative ease. For steel, the focus is placed on intermediate fabricated products. The document emphasizes that such a standard should include both direct and indirect emissions and be supported by price ceilings and floors to manage credit costs. Implementation via new legislation is preferred over the Clean Air Act to ensure coverage of imports and upstream emissions. Potential abatement technologies highlighted include fuel switching, carbon capture, use and storage (CCUS), energy efficiency, and hydrogen-based steel production.

The paper proposes a tradable performance standard for the U.S. cement industry that sets an emissions intensity benchmark. Producers exceeding the benchmark must surrender credits, while those below it generate tradable credits, creating a financial incentive for decarbonization. The authors recommend a standard covering Scope 1 and Scope 2 emissions per unit of clinker and mineral additives, with stringency increasing annually. To prevent carbon leakage, the standard would apply to both domestic production and imports. The paper emphasizes that this standard must be part of a broader policy suite, including innovation funding and market-demand policies, to address the high costs and technical barriers of deep decarbonization technologies like carbon capture, use, and storage (CCUS).

The paper argues that a low-carbon product standard—a market-based regulation establishing emissions intensity benchmarks with tradable credits—can incentivize the U.S. steel industry to adopt abatement technologies. It recommends regulating finished steel products (sheets, plates, bars, beams, pipes, and tubes) at the point of first sale, covering Scope 1, Scope 2, and significant upstream Scope 3 emissions (coke, lime, and direct-reduced iron). To prevent carbon leakage and maintain competitiveness, the authors suggest applying the standard to all steel products sold or imported into the U.S., including indirect steel products above a certain value threshold. The paper emphasizes that while such a standard is a powerful tool, it must be complemented by R&D funding, government procurement, and other policies to achieve full decarbonization.

ClientEarth argues that EU State aid rules must be transformed into sustainability instruments that prohibit support for fossil fuels and harmful biomass, while prioritizing energy efficiency and renewable energy. The document calls for the strict application of the 'Energy Efficiency First' principle, the exclusion of low-carbon (fossil gas-based) hydrogen from subsidies, and the removal of aid for high-efficiency combined heat and power (CHP) plants. It further recommends increasing support for energy communities, zero-emission vehicles, and energy efficiency in buildings, while introducing a 'greenwashing test' to ensure the environmental integrity of aid beneficiaries.

The policy brief argues that while free allocation in the EU ETS protects against carbon leakage, it mutes the carbon price signal for consumers, leading to underinvestment in material efficiency. To solve this, the authors propose a 'climate contribution'—a weight-based charge on the consumption of carbon-intensive materials sold in Europe. This mechanism would pass carbon costs to users and generate revenue for climate action without the high administrative complexity or trade conflict risks associated with border-focused CBAMs. The brief compares this approach against three other CBAM scenarios, concluding that combining dynamic free allocation with a climate contribution maintains a level playing field for exports and avoids 'resource shuffling' and downstream leakage.

The document outlines requirements for the EU's proposed carbon border adjustment measure, asserting that it must replace all existing industry protections, such as free pollution permits, to avoid being mere protectionism. It proposes that foreign producers buy pollution permits under the EU carbon market to strengthen carbon prices and incentivise innovation. The author suggests targeting the most polluting sectors—specifically steel, cement, and bulk chemicals—while exempting Least Developed Countries (LDCs) and Small Island Developing States (SIDS). Finally, it argues that all revenues generated should fund climate action, either through EU innovation funds or as climate finance for developing nations.

The report estimates that a net increase in investment of approximately 66 billion SEK is required to decarbonise Swedish heavy industry by 2045. This includes 50 billion SEK for the four largest emission sources—steel, petrochemicals, refining, and cement—and 15 billion SEK for carbon capture and storage (CCS) in the pulp and paper sector to achieve net-zero. The analysis reveals that financing challenges vary by sector: steel and petrochemicals face high capital expenditure (CAPEX) hurdles due to the need for transformative new processes, while cement and refining are primarily constrained by high operational expenses (OPEX) associated with adding CCS. The report argues that while the total costs are manageable compared to other national infrastructure spending, current carbon pricing under the EU ETS is insufficient to drive these investments, necessitating increased public risk-sharing and targeted industrial policy.

ClientEarth argues that EU competition policy must be reshaped to internalise environmental externalities and support the Green Deal. The organization calls for an end to state aid for fossil fuels, a more holistic 'consumer welfare' test in antitrust and merger assessments that includes future generations, and increased transparency in state aid decision-making. It specifically recommends prohibiting aid to forestry biomass and fossil-based hydrogen, while introducing a 'green bonus' to incentivize truly sustainable innovation.

Carbon Market Watch criticizes the EU's 2021-2030 state aid guidelines for compensating electricity-intensive industries against 'indirect costs' from the EU ETS. The author contends that the final rules expand the list of eligible sectors—including oil refineries and plastic producers—via an opaque 'qualitative assessment' and remove stringent climate conditions. The document further claims that the formula for calculating aid is weakened, ignoring the decarbonization of the power grid and risking windfall profits for industry while undermining the EU Green Deal.

The Clean Air Task Force (CATF) supports the European Commission's proposed Carbon Border Adjustment Mechanism (CBAM) as a tool to prevent carbon leakage and encourage global climate action. CATF argues that a CBAM must replace the free allocation of certificates under the European Emissions Trading System (ETS) and be paired with innovation policies for advanced decarbonization technologies. The organization specifically warns against including methane in the ETS due to the complexities and potential counter-intuitive effects of Global Warming Potential (GWP) time horizons. CATF recommends that the CBAM apply to all imported energy based on verifiable greenhouse gas intensity, exempt Least Developed Countries and Small Island Developing States, and reinvest all revenues into climate innovation both within the EU and in developing countries.

The report examines the compatibility of environmental import restrictions with WTO rules, specifically the General Agreement on Tariffs and Trade (GATT). It argues that restrictions based on process and production methods (PPMs) are not prohibited per se and can be justified through the concept of 'likeness' or by invoking general exceptions under Article XX of GATT. The document also provides guidance on using Free Trade Agreements (FTAs) to modernise trade rules, suggesting the inclusion of hierarchy clauses and the recognition of domestic regulatory discretion to ensure environmental obligations prevail over trade commitments.

The document examines the progress of five EU Member States in developing policies for a climate-neutral industry. It finds that while most have set 2030 targets, these are generally conservative and focused on energy efficiency. The Netherlands and Germany are the most advanced, implementing specific incentives for advanced technologies, whereas Hungary, Poland, and Spain remain largely in the agenda-setting and policy-formulation stages. The brief emphasizes the need for a predictable legal environment and harmonized EU policies to avoid distorted competition in the basic materials sector.

Carbon Market Watch proposes ten principles for the EU's Carbon Border Adjustment Measure (CBAM), arguing that it must replace free allocation of allowances in the EU ETS to adhere to the 'polluter-pays' principle. The organization recommends that CBAM cover direct and indirect emissions in high-emitting sectors like steel, cement, and bulk chemicals, and be implemented as an extension of the EU ETS. Key social and diplomatic recommendations include exempting Least Developed Countries (LDCs) and Small Island Developing States (SIDS), recycling revenues into climate action, and using the mechanism to complement international climate diplomacy and product requirements.

Ember argues that the 4th Projects of Common Interest (PCI) list should be the last to include fossil gas projects, as current infrastructure is sufficient and demand is projected to decrease by 2030. The organization advocates for prioritizing renewable energy sources (RES), energy storage, and smart grid technologies to meet EU emission targets, while suggesting that the responsibility for writing the Ten-Year Network Development Plan (TYNDP) be expanded beyond the two ENTSOs to reduce conflicts of interest.

The document exposes lobbying efforts by large polluters and the aviation industry to undermine climate action during the pandemic. It details attempts by groups like BusinessEurope and national trade associations in France, Germany, and the Netherlands to delay legislation and carbon taxes. It specifically critiques the aviation industry's push for unconditional bailouts and efforts to weaken the CORSIA carbon market baseline. The author argues that the pandemic should be used to accelerate a green recovery rather than return to business-as-usual, recommending the phase-out of free pollution permits and the introduction of fuel taxes.

The author contends that the EU carbon market (ETS) fails to drive industrial decarbonisation because over 90% of industrial emissions are covered by free allowances, leading to stagnating emissions since 2012 and windfall profits for companies. To address this, the document proposes that the upcoming revision of the Industrial Emissions Directive (IED) should remove the explicit exclusion of greenhouse gases (Article 9.1), allowing carbon emission limits to be integrated into environmental permits based on 'best available technology' (BREFs).

Carbon Market Watch argues that the EU should replace the free allocation of emission allowances in the EU ETS with a Carbon Border Adjustment Mechanism (CBAM) to ensure polluters pay for their emissions. The organization asserts there is no evidence of carbon leakage and proposes that a CBAM should be used as a tool for international climate diplomacy, exempt Least Developed Countries and Small Island Developing States, and be based on carbon performance benchmarks for sectors including steel, cement, chemicals, and power.