Carbon fatcats

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It’s that time of year again. Sandbag, the NGO focused on the EU emissions trading scheme, has published its list of ‘carbon fatcats’ – industrial firms apparently sitting on big piles of spare ETS emissions rights and helping wreck the market in the process.

Again the steel industry comes out top, with ArcelorMittal reportedly holding 93 million spare EU emissions allowances. But with new ETS rules introduced last year Sandbag thinks its surplus is diminishing relatively rapidly and certainly faster than that of fellow fatcats in the cement sector.

The picture also varies between countries with large surpluses continuing in Spain, Romania and France, while German ETS participants are now using more allowances than they are allocated, directly or through national auctions.

However, Sandbag can only work from the total number of ETS emissions allowances companies are allocated and the amount they surrender. They don’t know how many are sold to other ETS participants. With parts of the steel sectors on its knees through the recession, and facing shutdowns and job cuts, surplus ETS allowances were an asset that could be sold for instant cash, regardless of whether a company was better off holding out for a higher carbon price or waiting to use them when ETS emissions caps tighten, as suggested in the report.

OK, that still amounts to a subsidy for industry if the allowances were free but it doesn't necessarily fit with the picture of fatcats gleefully hoarding allowances and rubbing their hands at the prospect of long-distant price rises.

Meanwhile, other firms in carbon leakage prone sectors have been trying to ramp up production but are hampered by relatively small allocations of free allowances based on their low activity levels in previous years. EEF has been calling for allocation based on actual activity levels for years, and this approach would have avoided much of the current surplus.

In fact, Sandbag’s report is much more sober and understanding of industry than the fatcat phrase might suggest. Although that might be the element the press focuses on, they acknowledge the need to protect vulnerable industries from carbon leakage, and agree the current allocation system does not incentivise companies to cut carbon and can reward them for moving production abroad.

Like us (see our recent ETS report),Sandbag want governments to incentivise and reward emissions reductions – as they already do in the power sector – and recommend allocation based on actual production levels. They also want free allocation focused more closely on the industries that really need it.

In case this sounds all too cosy, there are clearly areas where EEF's members and Sandbag might not see eye to eye. For a start, Sandbag is calling for much of the current 2.1 billion surplus to be cancelled, bringing about an extra 5% emissions cut across Europe by 2020 on top of the EU’s politically agreed 20% target. They also want an early start to the European Commission’s proposed new Market Stability Reserve (MSR) preventing a coherent reform of the post-2020 ETS.

Like the Commission, Sandbag also fails to recognise the risk industry might have to pay for EU emissions reductions twice – once through their own investments in decarbonisation and those of their electricity suppliers (passed on in electricity bills), and again when the volume of ETS allowances is artificially lowered to remove the surplus these emissions reductions have created.

As the ETS matures, maybe we’ll come to see not every surplus is bad news.


Head of Climate, Energy and Environment Policy

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