Grandfather for the chop?: Permits to be auctioned in the EU

As all env-econ students will be aware (I hope), one criticism of tradable permits is that those who have historically polluted the most get given for free permits which they can then sell (assuming they reduce pollution). This system is known as grandfathering.

There has been increasing concern in the EU with the massive windfall profits being received by the most polluting firms which does not sit well with your average green protester.

Of course, the lobby groups are already pleading the "competitive" case whereby this new system will systematically undermine the competitiveness of EU industry in the newly globalised world. Inevitable.

Also inevitable is the "US dismay" headline. I suspect the US is nothing but dismayed whenever climate related issues hit the headlines.

From 2012 the EU has an alternative proposal.

EU's Barroso Says Pollution Permits to be Auctioned [PlanetArk]

LONDON - The European Commission will propose this week auctioning permits to emit greenhouse gases after 2012 in a package of measures to fight climate change, despite protests from business, its chief said on Monday.

"Allowances will be auctioned, with revenues going to member states, but any EU company will be allowed to buy allowances in any member state," Commission President Jose Manuel Barroso said in a speech prepared for delivery at investment bank Lehman Brothers in London.

His remarks confirmed predictions by European Union sources that the EU executive plans to force firms to buy at least some pollution permits, rather than receiving them for free as they do now under a scheme that has handed out windfall profits.

Barroso said implementing the EU's entire green energy plan will cost about 0.5 percent of gross domestic product a year, equivalent to about 60 billion euros (US$86.87 billion).

EU sources have said about 20 percent of permits to emit carbon dioxide (CO2) -- the main gas blamed for global warming -- are to be auctioned in 2013, fewer than Brussels originally envisaged, rising to 100 percent in 2020.

Europe's top business lobby, BusinessEurope, attacked the plan last week, saying that auctioning permits could hurt European industry in global competition.

Barroso also confirmed that energy-intensive industries might be given an easier regime for greenhouse gas emissions.

"In the case of need ... we should also be ready to continue to give the energy intensive industries their ETS (emissions trading scheme) allowances free of charge," he said.

The Commission might also "require importers to obtain allowances alongside European competitors, as long as such a system is compatible with World Trade Organisation requirements," Barroso said.

US DISMAY

EU sources say the Commission will review the impact on energy-intensive industries and possible support measures in 2011 in the light of whether there is an international agreement to curb greenhouse gas emissions by then.

Barroso did not identify the industries concerned, but EU sources have told Reuters a special regime would cover steel, aluminium and cement.

US Trade Representative Susan Schwab said on Monday she had agreed with EU Trade Commissioner Peter Mandelson that punitive trade measures should not be used against imports from countries that do not sign up to greenhouse gas emissions cuts.

"We have been dismayed at a variety of suggestions where we see climate or the environment being used as an excuse to close markets," Schwab said in response to ideas in earlier versions of the EU plan.

The Commission package, to be unveiled on Wednesday, will translate into draft legislation of EU leaders' commitment to cut greenhouse gas emissions by one-fifth from 1990 levels by 2020 and draw 20 percent of power from renewable sources.

The Brussels executive will set EU-wide targets for emissions from sectors such as energy and power generation covered by the ETS and national targets for CO2 cuts from other sectors such as buildings, heating and cooling and transport.

The package will also spell out how to increase the share of renewable sources in power production to at least 20 percent in 2020 from 8.5 percent now.

Responding to criticism from scientists and economists arguing that biofuels save little CO2, harm the environment and would require huge subsidies, Barroso said the EU would set strict criteria for their environmental sustainability.

"Effort sharing" on renewable energy would take into account different national starting points and potentials, he pledged.

Sweden and Latvia already draw almost 40 percent of their power from wind, hydro-electric, solar and biomass, while others such as Britain get only 1.3 percent from renewable sources. (Writing by Marcin Grajewski and Paul Taylor, editing by James Jukwey)

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