Carbon Fat Cats – Company Analysis of the EU ETS

For Phase 2 of the EU ETS running from 2008 to 2012 companies are to receive free allocations of EUA permits, each equivalent to one tonne of CO2 emitted. As a result of generous allocations compounded by the impact of the global recession, many companies now find themselves in a position where they have far more permits to pollute than they require. Whether or not these companies choose to sell the permits to generate windfall profits they have been effectively handed significant assets by Member State governments across the EU – thus we have termed these
companies, ‘Carbon Fat Cats’.

• The top ten Carbon Fat Cats share between them 35 million surplus EUA permits in 2008 equivalent to the annual emissions of Latvia and Lithuania. The permits are worth an estimated €500 million at current carbon prices.
• Looking ahead to 2012 the Carbon Fat Cats will share an estimated 230 million surplus EUA permits worth €3.2 billion a sum far greater than the investment in renewable and clean technology for the same period, or indeed the EU Commission’s budget for environment as a whole.

These companies are not required to make cuts to their CO2 and as EU ETS rules allow permits to be banked for use in future phases of trading and are likely to be insulated from the need to make cuts to their CO2 emissions going forward. Our findings run strongly counter to recent claims from industry groups that stronger climate change targets would damage competitiveness.

For key industrial sectors covered by the EU ETS we found that whilst the majority of companies were over-allocated, benefitting far more than others, and some were in the opposite position with shortages of permits. For instance, whilst the cement sector was universally over-allocated, some companies within the Iron and Steel sector did not have enough permits to cover their emissions. The findings have important implications for the implementation of Phase 3 of emissions trading and raise questions as to whether EU companies are operating within a level playing field.

The power sector, on the other hand, is acting as a powerhouse for CO2 reductions with analysis showing how a very small number of companies are required to deliver the majority of emissions reductions for the EU ETS as a whole and to compensate for the industrial surpluses.

• RWE and EON, the two companies most short of permits were required to carry out or pay for more equivalent emissions reductions than the net reductions for the scheme as a whole.
• The top six power companies short of permits were required to provide or pay for emissions reductions equivalent to the whole of the net ETS power sector reductions.

However, with most power companies buying EUA permits to comply with the ETS and passing the cost of compliance to EU power consumers; it is likely that EU citizens are unwittingly paying what amounts to a subsidy to industry without any cuts to CO2 emissions taking place.