EU Commission plans conditions for free emissions certificates – industry warns of competitive disadvantage

Berlin. The EU Commission wants to make the free allocation of emissions certificates dependent on consideration from industry: Companies should submit binding transformation plans and invest in the decarbonization of their processes. The companies criticize that this will further weaken their competitiveness.

In a letter available to Handelsblatt, 15 associations appeal to Federal Environment Minister Carsten Schneider (SPD), Federal Economics Minister Katherina Reiche (CDU) and the Federal Chancellery to oppose the plans in Brussels.

The letter says that the assumption that the equivalent of the free allocation can serve as a source of financing for transformation investments is incorrect. “The free allocation does not represent freely available capital, but rather an instrument to protect against carbon leakage,” write the associations. Carbon leakage is the migration of companies due to high CO₂ costs.

The company did not receive any additional financial resources from the free allocation, but only partial relief from the costs caused by emissions trading, the letter continues.

In mid-July, after long discussions, the EU Commission presented its plans for a revision of emissions trading. It is responding to pressure from some member states and industry to relax the regulations.

Emissions trading is the EU's most important instrument for reducing climate-damaging CO₂ emissions. Companies obliged to participate must provide a certificate for each ton of CO₂ emitted. Companies that compete globally receive some of the certificates free of charge.

The number of certificates decreases from year to year. A certificate currently costs around 80 euros. Since its introduction in 2005, the energy and industry sectors have been required to participate. Since then, emissions in the two sectors have fallen by 50 percent. The aviation and maritime transport sectors have now also been included in emissions trading.

In their letter, the associations argue that the introduction of additional investment requirements ignores the actual function of free allocation and thus significantly weakens its effectiveness. They also argue that the EU Commission is making incorrect assumptions. Investment incentives could only be effective if the necessary conditions for the transformation were met. But that is not the case in many places. The associations point to a lack of infrastructure, such as hydrogen pipelines, and a lack of access to low-carbon energy at competitive prices.

The associations that signed the letter include the Association of the Chemical Industry (VCI), the Federal Association of the German Foundry Industry, the Federal Association of the Glass Industry, the Copper Association and the German Chamber of Commerce and Industry (DIHK). The initiator is the Association of Industrial Energy and Power Industry (VIK). Large energy consumers from industry are brought together in the VIK.

The associations' arguments are met with approval at the Epico think tank. “Carbon leakage protection must not become an obligation to invest through the back door,” said Epico boss Bernd Weber to the Handelsblatt. There must be a “clear division of labor between instruments”: The CO₂ price should send investment signals and the free allocation should protect companies in global competition.

However, Epico differentiates in one place: As a compromise, the think tank suggests that the additional certificates allocated may well be subject to conditions. This could be gradually expanded later, Epico speaks of 2036. However, this expansion should only take place “if it is clear that this will actually mobilize additional investments without weakening carbon leakage protection,” said Weber.

The solidarity of the 15 associations represents a clear positioning. Not all industrial sectors obliged to participate in emissions trading evaluate the Commission's plans in the same way.

There are energy-intensive companies that believe they are already well on their way to transformation. These pioneers include steel manufacturers. They have already converted some of their systems to climate-friendly processes or are in the process of doing so - not least thanks to billions in aid from the federal and state governments. They are therefore critical of easing emissions trading.

"Those who invest billions in decarbonization early on must not be worse off as a result of later changes to emissions trading than those who waited. Otherwise we will reward attentism instead of investment," says Epico boss Weber. Anyone who invests today must be able to trust that politicians will not fundamentally change the rules of the game afterwards. “Where later changes to the regulatory framework substantially worsen the business case of investments that have already been made, a targeted, temporary bridge is needed,” demands Weber.

In a study prepared jointly with the consulting firm Frontier Economics, which focuses on energy and climate issues and which is available to Handelsblatt, Epico has developed a series of suggestions that are intended to protect pioneers.

This includes the recommendation to recognize investments that have already been made in order to avoid pioneers having to invest a second time. In addition, additional free allocations could provide additional relief for pioneers. Where the business model of a decarbonization investment that has already been made changes as a result of a later change in the conditions of emissions trading, there must be “targeted and temporary protection” in order to bridge economic gaps.