Heavily polluting industries are on course to receive the lion’s share of Emissions Trading System (EU ETS) revenue earmarked for Flanders between now and 2030, depriving the government of desperately needed resources to finance decarbonisation and a just transition. The Flemish government must change course, urges Yelter Bollen of Bond Beter Leefmilieu.

Belgium is in the midst of negotiations to form new federal and regional governments following recent elections, with difficult budgetary discussions front and centre. Using the new calculation tool from Carbon Market Watch, we can already pinpoint one key battleground: without adjustments, heavy industry will consume nearly the entire Flemish Climate Fund.

The European Emissions Trading System (ETS) generates revenue from the auctioning of emission allowances. With this income, the previous Flemish government co-financed many policies through the Flemish Climate Fund, such as renovation subsidies. However, a significant portion also went to heavy industry through the so-called ‘indirect cost compensation’ (also known as indirect carbon leakage or ICL). 

As the name suggests, this subsidy is intended to compensate heavy industry for potential ‘indirect’ emission costs associated with their electricity bills. Electricity producers have to pay for ETS allowances, a cost they may pass on to their customers, including industrial companies. Fearing this might lead to competitive disadvantages, member states are allowed to support firms using ‘indirect carbon leakage’, a subsidy that varies with the price of CO2, within certain bounds set by the Commission. 

Flanders has been an enthusiastic user of this provision. Between 2022, nearly a third of Flemish climate revenues went to compensation support, making it one of the most generous governments in this regard in the EU. 

In the coming period (2024-2030), it appears this balance is set to tilt even more towards industry. Unless there is a change in policy, this subsidy will consume around three-quarters (60-80%) of Flanders’ ETS revenue. This conclusion is evident when we combine data on auction revenues from Carbon Market Watch’s simulator with official estimates on ICL published by the Flemish government.

The Carbon Market Watch simulator allows us to estimate ETS revenues for each country. For Belgium, auction revenues will bring in a significant sum of money for the period 2024-2030: more than €4.6 billion at an average carbon price of €90 per tonne (a conservative estimate).

Flanders will likely receive about 52% of this revenue (based on the current intra-Belgian distribution of ETS revenues), totaling approximately €2.4 billion. Note that with a constant price, revenue will eventually decline because the amount of allowances (and thus the number of auctioned rights) is set to fall by 2030.

We can combine these estimates from the revenue side, with expenditure-side estimates on indirect carbon leakage. Here, we can use official Flemish government estimates of the planned spending on industrial compensation subsidies for the coming period:

When we combine these two pictures, the result is sobering. Based on official estimates, the next government is set to spend nearly €1.5 billion on compensation subsidies in the period to 2030. In 2030, heavy industry would suck up €227 million out of an estimated €280 million, leaving only 20%, or €52 million, for other climate policies.

Paying polluters

Moreover, this money flows to a limited group of about 30 companies, including TotalEnergies, which would receives over €120 million.

This is all the more worrisome because these subsidies are not well-spent. Even after recent reforms, the money mainly supports the ‘status quo’ – at a time where we are confronted with the need for a deep transformation of our industrial fabric. Existing companies receive a guaranteed income stream without stringent conditions and without environmental safeguards that direct this money towards future-oriented investments. 

The primary justification for this subsidy was always competitiveness. However, Deloitte, in a report commissioned by the Flemish government, investigated the effectiveness of this subsidy in 2021 and concluded that “Neither the reduction nor the abolition of ICL is expected to affect employment or lead to relocation.“

We can draw two conclusions here. First, we must reduce heavy industries’ share of incoming climate funds. There are severe budgetary needs to invest in a just transition across all sectors, and a significant portion of ETS revenues must continue to flow towards households and small businesses. Secondly, the money that does go to these industrial players should be intrinsically tied to boosting industrial decarbonisation.

Future-proof investment

The latter conclusion points to a clear choice that the parties negotiating the next Flemish government now face. In a context of budgetary constraints, we can either continue to finance ‘business as usual’, hoping that things somehow work out both competitively and environmentally. Alternatively, we can focus our funding on future-proof investments. 

Following the example set by countries like the Netherlands and Germany, Flanders should rethink its industrial subsidies. A pilot scheme launched at the end of the last legislature (may 2024) which awarded €70 million in funding for industrial decarbonisation through a contract for difference (CfD) went in the right direction.

For large-scale impact, our own calculations show that we need about €1.5 billion over 15 years. This corresponds to about €100 million a year, or roughly 30% of our incoming ETS revenue. Flanders should lock in these funds for the industrial transition, maintaining the current ratio between industry and the ‘rest’ without consuming the entire budget. The remaining 70%, nearly €1.5 billion, would then be available for the transition in transport, housing, and so forth.

In this way, we reduce our dependence on fossil fuels while simultaneously stimulating clean technologies and shifting away from the defensive ‘fingers crossed’ policies that have characterised Flemish industrial policy up till now.

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Yelter Bollen is a policy expert focusing on climate and finance at Bond Beter Leefmilieu. This article first appeared in Dutch in BBL’s newsletter.