EU environmental policy awards millions in windfall profits to oil companies and heavy industry
14 December 2009
As national ministers meet this week in Copenhagen to discuss a new climate change deal, Open Europe has found that under the EU’s Emissions Trading Scheme (ETS), oil and gas companies’ operations in the UK were granted a surplus of carbon permits worth €28.6m in 2008. For example, ExxonMobil received €4.3m and Total received €5.4m.
Meanwhile, heavy industrial polluters such as Corus received €47m, while cement firms Hanson and Lafarge received €17.3m and €20.2m.
The EU is keen to be seen to take the lead at the UN climate change summit in Copenhagen and has already announced ambitious targets to reduce its carbon emissions. However, the EU’s principle policy for achieving those reductions, the ETS, is fundamentally flawed.
Due to the economic downturn, many heavy polluters, such as oil and gas companies and heavy industrials, have been left with a surplus of carbon permits – essentially a free asset that firms can sell on to bolster their short term profits.
The glut of surplus permits on the market has driven down the price of carbon and led to a sharp increase in the number of permits being traded via carbon exchanges. Open Europe has found that the two largest carbon trading exchanges, European Climate Exchange and Bluenext , which includes members such as Barclays Bank, JP Morgan, Merrill Lynch and Shell, have earned a combined average of €245,000 a day from the trading of carbon permits so far in 2009, in transaction fees alone. In total, they have made over €57m between them in 2009.
Instead of producing a firm carbon price to encourage investment in greener technologies, the ETS has become a subsidy to some of the UK’s biggest polluters and has simply created a new breed of carbon traders, which are cashing in on a policy that is failing to achieve its core objective.
Open Europe Analyst Stephen Booth said:
“It is a perverse situation when our chief environmental policy is granting such huge benefits to companies that pose the most harm to the environment. Profits should be greasing the wheels of the emissions trading system rather than lining the pockets of the biggest polluters and carbon exchanges.”
“The ETS is meant to be an environmental policy. Instead it has become an industry in its own right. The concept of trying to create a ‘carbon market’ is all very well but ultimately the ETS is failing in its core objective – to reduce emissions while encouraging investment in the future low carbon economy.”
“The EU is desperate to be seen as a leader at the Copenhagen summit but its principle environmental policy leaves a lot to be desired. In this context it’s completely understandable that other nations, like China and India, are sceptical about the EU’s grandstanding.”
BACKGROUND
The EU’s emissions trading scheme (ETS) is failing in its key objective:
Under the ETS, firms in the power sector and heavy industry are allotted an annual quota of emissions permits called EU Allowances (EUAs) for free, and are forced to buy more if they emit more carbon dioxide than allowed. By setting a cap on emissions allowances the ETS is designed to make carbon scarce, thereby putting a price on each tonne emitted. Previous research by Open Europe found that the ETS will cost the EU economy over €14 billion a year .
The volume of carbon trading across the globe has increased dramatically in recent years. According to the World Bank , the value of the ETS market increased from $49 billion to $91 billion between 2007 and 2008.
Although carbon emissions in the EU declined last year, according to the European Environment Agency “The vast majority of the decline in emissions in 2008 was due to lower CO2 emissions from fossil fuel combustion in the energy, industry and transport sectors. The 2008 emission reductions reflect the effects of the global economic recession which began in 2008, which resulted in reduced industrial output and reduced energy consumption by industry, and correspondingly reduced freight transport.”
The recession has left heavy industry with a huge surplus of allowances as their emissions declined, which in turn reduced the price of carbon. The current carbon price of €14/tonne is too low to incentivise investment in greener technologies and is therefore simply delaying moves towards a low carbon economy.
In an October 2009 report, the UK Government’s Committee on Climate Change commented that, “The recession has also led to a reduction in EU traded sector emissions which has reduced the carbon price and could undermine incentives for investment in low-carbon technologies in the UK’s energy-intensive sectors, including power generation.”
In January 2009, Vincent de Rivaz, the Chief Executive of the UK arm of EDF, said, “the carbon price has to become simple and not become a new type of sub-prime tool which will be diverted from what is its initial purpose: to encourage real investment in real low-carbon technology.”
Millions in windfall profits to oil companies and heavy industry
The recession has decreased the demand for energy and reduced industrial output. This has left both oil and gas refineries and heavy industry with a surplus of carbon permits, which they can sell to boost their short-term profits.
Oil and Gas companies in 2008:
Company Value (€)
BP € 111,636
ConocoPhillips € 4,532,458
Exxon/Mobil € 4,333,280
Ineos Refining € 4,422,796
Petroplus € 5,477,220
Shell € 699,650
Talisman € 1,394,932
Total € 5,367,194
Tullow Oil € 2,265,606
Total € 28,604,772
Heavy industrials in 2008:
Value (€)
Corus €47,011,790
Hanson €17,313,618
Lafarge €20,213,704
The value reflects a carbon price of €14. The data has been extracted from the EU’s Community Independent Transaction Log for the year 2008 .
For a breakdown of the figures see:
http://www.openeurope.org.uk/research/ets2008.xls
In addition, recent press reports note that the Department of Energy and Climate Change has confirmed that Corus’ owner Tata Steel is likely to get its free allocation of carbon permits for 2010, valued at around £90m, for its steel and iron works in Redcar, Teesside despite announcing last week that it plans to close the plant . The closure of the plant is likely to cost 1,700 jobs.
Carbon exchanges cashing in with €245,000 a day in transaction fees
In 2008, the European Climate Exchange (ECX) and Bluenext accounted for 92% of exchange-traded EU carbon permits – the ECX had 83% and Bluenext 9%.
So far in 2009, the value of the carbon permits traded through both exchanges is €85,304,050,227 – or €364,547,223 a day.
Members of the Blunext carbon exchange include Barclays Bank, JP Morgan, Merrill Lynch and Shell .
Both the ECR and Bluenext offer different types of tradable carbon products, which are subject to different transaction fees. The transaction fee is charged twice – once for either side of the transaction.
ECX have made a total of €19.2m so far, while Bluenext have made €38.2m. The total €57.4m has been divided by the 234 days that the exchanges were open for trading in 2009. The figures represent trades made in 2009 up to 30 November.
EUAs are the standard carbon allowance for the EU and are equivalent to one tonne of CO2. CERs are set against emission reduction projects in developing nations and are meant to represent the equivalent of a reduction of one tonne of CO2.
For a breakdown of the figures see:
http://www.openeurope.org.uk/research/carbonexchanges2009.xls
NOTES FOR EDITORS
1) For more information, please contact Stephen Booth on 00 44 (0)207 197 2333 or 0044 (0)788 162 5889.
2) Open Europe is an independent think-tank calling for reform of the European Union, with offices in London and Brussels.
Its supporters include: Sir Stuart Rose, Executive Chairman, Marks and Spencer plc; Sir Crispin Davis, Former Chief Executive, Reed Elsevier Group plc; Sir David Lees, Chairman, Tate and Lyle plc; Sir Henry Keswick, Chairman, Jardine Matheson Holdings Ltd; Lord Sainsbury of Preston Candover KG, Life President, J Sainsbury plc; Sir John Egan, Chairman, Severn Trent plc and Lord Kalms of Edgware, President, DSG International plc; Hugh Sloane, Founder, Sloane Robinson.
For a full list, please click here:
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