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European Parliament votes to keep free emissions allowances for key sectors

11 March 2021

European Union emissions allowances (EUAs) hit a record high on 10 March, but the recent run-up in carbon prices provided ammunition for center-right members of the European Parliament (MEPs), who won a non-binding vote 9 March to maintain the supply of free allowances to key industrial sectors such as cement, chemicals, and steel.

The parliament's Environment Committee had voted in February to phase out the provision of free EUAs to those carbon-intensive sectors after their competitors' exports to the EU are subject to a charge equivalent to the value of an EUA, through the application of a carbon border adjustment mechanism (CBAM).

However, while voting to introduce a CBAM by 1 January 2023, MEPs narrowly voted against phasing out free allowances when the CBAM is implemented. The vote was by 334 votes to 329 against, with 23 abstentions.

Advocates of ending the provision of free allowances argue that maintaining that provision at the same time as introducing a CBAM would represent so-called "double protection." Such a scenario could risk falling foul of World Trade Organization rules and could prompt retaliation by the EU's trading partners, who may well challenge a CBAM at the WTO even if free allowances are phased out.

However, the phasing-out proposal sparked a furious lobbying effort last week by industry associations representing sectors that would have to pay for their carbon credits from 2023 if the Environment Committee's plan had passed the full parliament.

Steel industry association Eurofer, cement association Cembureau, lobbying group Fertilizers Europe, and chemicals association CEFIC joined forces to insist free allowances be maintained.

EU employers association BusinessEurope issued a statement 8 March, saying: "We must ensure our companies' competitiveness by maintaining existing measures, like the free allowances under the EU ETS, at least as long as the new [CBAM] is in a testing phase and has not yet proven its effectiveness."

The narrow victory for the European People's Party (EPP) -- the grouping of center-right European parties -- means that the text approved by the Environment Committee in February for the "rapid and eventual complete phasing out" of free allowances will be deleted from the European Parliament's forthcoming submission to the European Commission (EC) on how a CBAM should be initiated.

Next step

The vote and the parliament's subsequent submission to the EC, the executive arm of the EU, are not legally binding. But the vote will play a key role in shaping the EC's proposals for a CBAM and other measures deemed necessary to reach the EU's goal to reduce the 27-member bloc's emissions by 55% in 2030 compared with 1990 levels.

The EPP did not get its way entirely, failing in a vote to delete text from the submission related to which sectors should be subject to a CBAM. The industries included in the amended text include the cement, oil refining, steel, aluminum, paper, glass, chemicals, and fertilizers sectors.

The debate on phasing out free allowances has been sharpened this week by record-high prices for EUAs, which have risen 28% since the start of the year to a new intra-day high on 10 March of €41.85/metric ton.

EUA prices have been boosted partly by increased buying by investment funds, amid speculation that emissions contracts represent a one-way bet given the EU's increasingly stringent climate policies.

This week, analysts and trading sources suggested EUAs could move as high as €50/mt over the next few months, with the recent rally in the energy complex providing the latest boost to the market. "Power, gas, and emissions have been well bid all day today," Jan Kresnik, a carbon trader at Belektron, told OPIS

Analysis published by Swedish bank SEB "might have poured some optimism on the market," Belektron said.

The note issued by SEB predicted that the recent sharp rally for oil was set to pull the wider energy complex and EUAs higher. "The EU carbon price is trading consistently versus fuel price fundamentals in Europe, but European TTF gas prices are lagging Japanese LNG prices, which again are lagging the latest gains in oil," said SEB. TTF is the Netherlands Title Transfer Facility, the highest-volume natural gas trading hub in Europe.

"If oil price gains had been properly reflected in LNG and TTF, then the current EUA price would have traded at €43-50/mt today. There is thus a real catch-up game going on from oil to LNG to TTF to carbon," SEB concluded.

Original reporting by Anthony Lane, OPIS.

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