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1st Mar 2024

EU court asks for reform of carbon emission permits

Exxon Mobil, Dow Chemical, Shell and other companies had challenged an EU decision to reduce the number of carbon emission permits they were allocated for free under the European emissions trading scheme (ETS).

But the European Court of Justice (ECJ) ruled on Thursday (28 April) that they in fact had been given too many.

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The European Commission uses a ’correction factor’ to ensure the allocation of free allowances doesn’t exceed the cap allowed under EU law. But the ECJ said that it used erroneous data as the basis of its calculations, making the number of free emissions too high.

The court gave the commission ten months to correct the number of free allowances.

The commission is now expected to come to a lower number of free allowances to distribute. That would increase costs for the heavy polluters that had lodged the complaint.

”The commission will study in detail the implications of the judgment and will make further announcements in due time”, a spokeswoman said on Thursday.

She added that the commission made proposals to improve certainty for the industry regarding future free allocation, such as a fixed auction share, a stable carbon leakage list and predictable benchmarks, in its proposal for the next stage of the ETS - phase IV that will stretch over 2021-2030.

”These elements of the commission proposal aim to reduce, if not avoid, the need for a correction factor to apply in phase IV," the spokeswoman said.

She added that "a recent expert meeting has confirmed market analysts' views that the commission proposal is successful in this regard".

THE ECJ's ruling however created confusion in the European Parliament, where deputies are planning the future of the scheme.

The commission has suggested to maintain the current proportions between free and paying emissions, but this could change in the wake of the ruling.

”According to early analysis, the auction share could move from 57 percent to 58 percent” said British Conservative MEP, Ian Duncan, who is the parliament’s main negotiator of the phase IV system.

”We need the commission to clarify this as soon as possible.”

EU institutions say the ETS is their main tool to address climate change and reach the EU target of a 40-percent reduction of carbon emissions by 2030.

But the system is not functioning well. Economic problems have lowered the demand for paying emission allowances, making their price plummet.

Furthermore, some emissions are given for free to industries that could move their production out of Europe to countries with less ambitious climate measures. This is what is called the carbon leakage.

Femke de Jong, ETS specialist at the NGO Carbon Market Watch, said there was no evidence that a carbon leakage actually happens.

”It’s even less likely to do so after the Paris agreement”, she argued.

Meanwhile, WWF Europe urged EU lawmakers to make sure that polluters pay for their greenhouse emissions.

“The EU ETS needs to be reformed in order to make polluters pay, rather than paying polluters, as today’s ruling confirms. Policy makers must ensure that the European carbon market delivers more and faster emission reductions, and commit to phasing out free pollution permits,” said Imke Luebbeke, the environmental NGO's head of climate and energy.

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