Harrabin's Notebook: Surplus credits

In a new column, the BBC's environment analyst Roger Harrabin draws on his experience of a quarter of a century reporting the environment to ask if Europe's power consumers are indirectly subsidising firms hit hardest by the downturn.

Europe's power companies are keen to buy surplus permits from other firms

Research suggests that Europe's main system for tackling climate change is cushioning the effects of the recession a little on major industries.

The research, from the pressure group Sandbag, shows that firms which have cut production because of the downturn have been left with surplus pollution credits they can sell on the European carbon market.

Europe's power firms are still short of CO2 permits and are keen to buy surplus allowances from cement and steel makers.

In effect, through their power bills, Europe's power consumers may indirectly be subsidising those firms worst hit by the downturn.

"This is a subsidy for not producing … it wasn't quite how the EU ETS was supposed to operate," Henrik Hasselknippe from analysts Point Carbon told me. He estimates the surplus is worth about £10bn to struggling industries between now and 2012.

It is not the first windfall on the EU ETS. Power firms enjoyed their own multi-billion pound bonus in previous years by raising power prices to consumers as if they'd had to buy their pollution permits when in fact they'd be given plenty of permits free of charge.

But the current revelations may offer a salutary tale about the lobbying stance of business. Over the years I have seen industries lobby against pollution legislation, claiming it would cost jobs. The same firms have often managed to pull an entirely new clean product off the production shelf when legislation was introduced.

States like California which run the tightest pollution regimes frequently benefit by developing clean industries which are able to take advantage as other states follow the lead in cleaning up.

Taking action

But the genuine fear over jobs makes it hard for governments anywhere to take firm action on pollution because it's the firms, not the governments which really know what the effects will be. Take these two recent news items.

In the Independent on 14 December 2008, Phillipe Varin, chief executive of Corus, warned that European steel production would wither unless governments tackle the cost of carbon credits used to offset emissions. "If we are forced to buy CO2 credits on the market without a system to improve our production process, then we will not produce steel in Europe," said Mr Varin.

In EurActiv on the 25 June, Roland Verstappen, vice-president for international affairs at AcrelorMittal, said steel industries were considering relocating their European operations to other parts of the world because of climate legislation.

Today's Sandbag report suggests that the Corus plant at Ijmuiden in Holland had 4,179,278 surplus credits in 2008. The ArcelorMittal plant in Gent had 4,362,231 surplus. The pollution league table in the report is based on official EU data published in April.

ArcelorMittal told BBC News that it was not selling any spare permits but were stockpiling them for the future and handing them to partner utilities to keep down power costs.

But Dr Hasselknippe from Point Carbon said: "This shows that the EU ETS itself is not a significant cost - in fact it's clear some firms are making a profit from it at the moment - even though they would doubtless prefer to be making a profit from making more of their products."

"There is frequent talk of carbon leakage (polluting jobs going abroad) but little evidence that this is really happening. It's usually labour costs that are the key."

The US government has suffered accusations in the past that it has driven jobs abroad through pollution rules, when government officials suspect that firms are using clean-up rules as an excuse to avoid the wrath of unions whilst cutting costs by shifting to developing countries.

The squeeze will really be on in Europe between 2012 and 2020, by which time all pollution permits for firms will need to be purchased at auction, thus ending industry windfalls.

It is then that firms really fear competition from countries with more relaxed regimes for controlling carbon. That's why the EU is pressing so hard for a global deal on climate change in Copenhagen later in the year so export industries round the world compete on a level playing field when it comes to pollution.

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