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The last week and a half has seen a resurgence of the debate around Europe’s 2020 climate targets, with Energy Commissioner Oettinger, Climate Commissioner Hedegaard and the UK Energy and Climate Secretary Chris Huhne taking turns to grab headlines. Last week also saw the leak of a draft Commission Communiqué on the 2050 roadmap which proposed that 25% cuts would be delivered by the revised Energy Efficiency Plan, and reopened the debate about removing significant volumes of permits from the 2013-2020 carbon budget.

Commissioner Oettinger, who appears to be a keen supporter of energy efficiency and new energy infrastructure like smart grids and supergrids kicked off the debate with some remarks disparaging the likelihood of Europe adopting 30% cuts in emissions by 2020. Fears about steel’s competitiveness under a 30% regime were chief amongst Oettinger’s concerns, and Oettinger’s remarks were stamped with the increasingly familiar hyperbole of the steel lobby, namely that ambitious climate targets threatened to “deindustrialise Europe”.

This last remark echoes the language of Eurofer almost verbatim, as we saw inGordon Moffat’s letter to the commission last October. Chris Huhne was quick to respond with the economic case for increasing climate targets in light of rising oil prices, while Commissioner Hedegaard weighed in to argue that growing industrial production was more likely, not less, under a low carbon framework.

Sandbag was particularly interested to see the leaked draft of the 2050 roadmap reopened the debate about a “set aside” of permits from the Phase 3 cap. While the Commission has previously proposed removing 1.4 billion permits from the 2013-2020 budget as a means of preparing the traded sector for a 30% climate target, the 2050 roadmap presents a set aside of 500-800 million permits as direct adjustment for the oversupply of permits in Phase 2.

Sandbag’s research would suggest the even the larger 800 million figure, is likely to be an underestimation of the overallocation in Phase 2, as we anticipate surpluses of a billion permits accruing to industry (and combustion tied to industrial processes) – surpluses which were overwhelmingly the result of overallocation and recession rather than active efforts to decarbonise. The scale of this oversupply gives the lie to industry’s claims to be threatened by the scheme, as this surplus will be carried forward to buffer it against Phase 3 caps. The European steel sector alone stands to accrue 130 million of these surplus credits, and one cannot help but wonder how, in a sector so fearful of Phase 3 caps, its largest representative, Arcelor Mittal, can afford to sell of€211 million worth of its Phase 2 surplus.

Not only did Sandbag estimate a higher figure for Phase 2 overallcoation, we recommended a much larger adjustment be made for this in the Phase 3 cap. The Commission’s latest proposed set aside (500-800 million permits) is based on a direct subtraction of the Phase 2 surplus from Phase 3, but this fails to account for the way these surpluses have artificially inflated the baselines from which the whole Phase 3 budgets were calculated.

The Phase 3 budgets were derived by charting an annual decrease of 1.74% to the average Phase 2 budget, but the surpluses in Phase 2 push this average up by some 200 million permits. By adjusting this baseline down, Sandbag derives a Phase 3 budget 1.4 billion tonnes smaller than the one currently proposed. A graph showing how this calculation was applied to the industrial sector is pictured.

A set aside of this scale would be a truer reflection of the impact of overallocation on Phase 3 and would go a long way to absorbing the 1.8 billion stockpile of permits and offset credits we expect to carryover into Phase 3. A carryover of this scale threatens to allow Europe’s domestic emissions to grow as much as 34% by 2017. While we welcome any moves to tighten the Phase 3 cap, the figures currently proposed are insufficient to adequately drive domestic European abatement in the traded sector.

Industry Ph3 corrected