Mario Draghi has counted the cost for ‘EU global competitiveness’. Carbon Market Watch’s Lidia Tamellini warns heavy industry must make meaningful decarbonisation efforts in return for the subsidies it receives from the Emissions Trading System (ETS)
Commission President Ursula Von der Leyen announced a new Clean Industrial Deal for competitive industries and quality jobs in the first 100 days of the new Commission mandate. In order to do this, she will take inspiration from the report she delegated to Mario Draghi to assess and advise on the status of the competitiveness of the European economy.
Draghi restarted discussion of a sensitive topic – how much public spending is required to fund the energy transition – with a declaration that massive investments are essential for the EU to ‘win’ the global competitiveness race.
According to the report an additional €750-800 billion must be spent annually between 2025 and 2030, corresponding to 4.4%-4.7% of EU GDP. In practical terms, €450 billion alone would be needed to fund the energy transition (including transport), with an additional €100-150 billion for productivity boosting “innovation”.
Fund-amental problem
Draghi’s forecasts should come as no surprise. The European Central Bank previously published similar numbers, forecasting an additional yearly €477 billion to bankroll investments to achieve the energy transition.
The report highlights that “funding currently available [to decarbonise heavy industry] is clearly insufficient” by pointing at the limited resources available to the EU’s Innovation Fund.
This centralised funding mechanism exists thanks to EU ETS revenues, generated by the auctioning of carbon allowances. Its shallow pot (roughly one twelfth of total EU ETS revenues goes into the Innovation Fund – around 530 million ETS allowances, or around €45 billion between 2021 and 2030) is largely due to the fundamental problem that an overwhelming amount of carbon allowances are in fact not auctioned, but handed out for free.
This will slowly change in the coming years, due to the phasing out of free allocation and the introduction of the Carbon Border Adjustment Mechanism (CBAM). But before 2030, the EU ETS is scheduled to hand out €226.7 billion in emission allowances for free instead of auctioning them.
It is therefore quite surprising that a few short paragraphs following the admission of insufficient financing Draghi suggests, if the CBAM is not implemented quickly or effectively enough, the Commission may have to rethink the free allocation phase-out timeline. That cure will definitely not make the disease better.
Less freebies, more innovation
While far from a perfect system, the redistribution of revenue from big polluters to innovators through the Innovation Fund allows for better monitoring of investments made by companies. If heavy emitting companies invest in an innovative and clean technology, they can be rewarded through the Innovation Fund.
This mechanism has been set up specifically to help the sectors covered by the EU ETS to decarbonise, including by financing “products and processes substituting carbon intensive ones” and innovative and breakthrough technologies.
The Fund is primarily financed through allowances that would otherwise be allocated for free and, as shown in the Innovation Fund graph, will significantly increase as the free allocation system is phased out. Moreover, the European Commission can front load allowances to guarantee the Fund has sufficient resources to foster and scale-up innovation.
Clearly the Innovation Fund is insufficient to fund the investment needed to ensure European industry reaches zero emissions (or as close as possible to zero emissions) by 2040, and the Draghi report, as well as the Communication on the Clean Industry Dialogues and several industry stakeholders call for investing a higher percentage of member state ETS revenues into the decarbonisation of heavy industry.
However, none call for an increase of the Innovation Fund, or for guaranteeing easier access or faster disbursement of money. Instead they suggest slowing down the CBAM, an essential pillar of the EU’s new climate architecture, the evident source of more potential funding for industrial innovation.
When examining the most recent EU ETS emissions data, companies belonging to industries manufacturing cement, lime and plaster accrued over 2.1 billion free allowances between 2010 and 2023, compared with only 1.9 billion tonnes of verified CO2 emissions.
An even more staggering number can be sourced for the steel industry: a value of 8.1 billion free allowances versus 7.8 billion tonnes of CO2 emissions. This demonstrates that those (and other) sectors, since the beginning of their inclusion in the EU ETS, received more free pollution permits than they needed. These allowances are bankable and have increased in value over time and there is little transparency regarding how the massive windfall profits have been used by companies.
Climate action must be rewarded
Additional climate spending is needed in several areas including adaptation, biodiversity, clean transport and heating, protection of vulnerable citizens and communities. If more support is to be handed out to heavy industry it can no longer be unconditional. It should be made clear exactly how many tonnes of CO2 will be saved, in which time frame, and how proportionate the investments will need to be.
Moreover, if increased funding is guaranteed to heavy industry, the handout of subsidies must be monitored carefully to ensure that the same product is not being financed multiple times. The incoming Commission is expected to table new rules on green public procurement that instead of subsidising bad habits, will incentivise industry to produce cleaner basic material such as cement and steel.
There is an increasing need for both public and private expenditure, and an availability of growing ETS revenues. Those delivering the most climate action must be rewarded.
Time is running out, and ETS revenues can only be spent once. Society can no longer afford to give polluters a free pass for no return.
