EU ETS £250m compensation scheme needs ‘tightening’ warn MPs

Large companies already profiting from the over allocation of EU Emissions Trading System allowances (ETS) could be over-compensated by the Government, MPs have warned.

The cross-party Environmental Audit Committee (EAC) has scrutinised the Government’s £250m compensation scheme, which aims to help energy intensive industries who will face added costs as a result of the ETS and the Government’s Carbon Price Floor (CPF).

Today it published a report of its inquiry into the Energy Intensive Industries Compensation Scheme, arguing that it must be tightened up to avoid over-compensation.

The Government already announced in November that energy intensive industries would be exempt from costs arising from long-term ‘contracts for difference’ (CFD), which are designed to increase investment in low carbon technologies. 

However, the EAC pointed to the example of Europe where a surplus of emission allowances in the EU ETS worth €4.1bn (£3.3bn) had been accrued by large industrial companies.

These companies have made €1.8bn (£1.5bn) by selling allowances, and MPs argue that the Government’s proposed rules do not take the value of these excess allowances into account when calculating compensation.

Chair of the Committee, Joan Walley MP said: “I welcome the Government helping energy intensive companies cope with additional carbon price rises to stop them moving jobs abroad.

“But it shouldn’t throw good money after bad by giving compensation to those already making windfall profits from the Emissions Trading Scheme when allowances were allocated free-of-charge.”

The ETS has created a Europe-wide cap-and-trade market for carbon that aims to reduce emissions at the lowest possible cost through the introduction of a price of carbon.

The CPF was introduced by the UK Government to ‘top up’ the carbon price to a target rate in an attempt to reduce investment uncertainty in low-carbon generation.

According to the Government, energy intensive industries such as iron, steel and chemicals could face indirect costs known as ‘carbon leakage’ because they will pay higher electricity prices as a result of generators burning fossil fuels and passing ETS and CPF costs onto them.

Manufacturing groups have welcomed the Government’s protection of energy-intensive industry and trade union the Engineering Employers Federation (EEF) say the EAC’s argument that firms could enjoy windfall profits are misplaced.

Speaking to edie, EEF head director of UK Steel Ian Rodgers said:

“We utterly refute the notion that there is any risk of over-compensation.

“The Environmental Audit Committee seems to be saying that because companies that have been in receipt of free allowances under the ETS and have been producing less with the recession and therefore have spare allowances, they shouldn’t get any further compensation in respect of the increasing electricity prices.

“However, they are mixing up two fundamentally different things.”

The EEF says it is important to make the distinction between carbon-intensive industries, which are direct emitters of CO2, and electro-intensive industries which are indirect emitters.

Rodgers said: “The companies that stand to benefit from the Government’s compensation scheme are electro-intensive and by and large will not have benefited to any degree of significance from this free allowance issue because the energy they use is electricity and therefore they do not have any significant direct emissions.”

Conor McGlone

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