Dutch companies made €1bn selling free pollution rights
“Carbon leakage” refers to a hypothetical situation where companies transfer production to countries with weaker climate policies in order to lower their costs.
Under the current EU Emissions Trading System (EU ETS) rules, industrial companies that are believed to be at risk of “carbon leakage” are awarded free pollution permits.
Free allocation has resulted in significant windfall profits for corporations. Windfall profits occur when industrial companies are over-subsidised for their pollution. Energy-intensive companies in the Netherlands made over €1 billion from the EU ETS during 2008-20142.
The corporations in the Netherlands that were able to make the most profits from the EU’s carbon market are Tata Steel (over €300 million), Shell (over €200 million) and Chemelot (€90 million).
European taxpayers are picking up the bill as governments forego income and lose out on revenues from auctioning these pollution permits. As a result of free allocation, less money is available for investments in the climate friendly transition of the European economy.
In the 2008-2014 period, the Dutch government has given out 533 million free pollution permits and has thereby missed out on at least €6.4 billion in auctioning revenues.
Some corporations have used the EU ETS to increase their cash flows by using the theoretical risk of “carbon leakage” as an argument to receive pollution subsidies from governments.
Heavy industry in the Netherlands was able to generate over €1 billion in windfall profits from the EU ETS during 2008-2014 in the following ways:
1. Windfall profits from surplus: €236 million. Industries have received more emission allowances for free than they actually need, and are able to sell their surplus for a windfall profit in the market.
2. Windfall profits from offsets: €27 million. The price for international offsets is much lower than the price for emission allowances. Industries have, therefore, bought international offsets to comply with their targets, and are able to sell their remaining free allowances for a profit in the market.
3. Windfall profits from cost-pass through: €819 million. Industries have generated windfall profits by letting their customers pay the price for freely obtained emission allowances.
The sectors in the Netherlands that have profited most from the EU ETS so far are the refineries, iron and steel, petrochemicals and fertilizers sectors.
Within these sectors, the petrochemical sector was able to generate the most money by receiving too many free allowances and selling this surplus for profits on the market. ■