Civitas Institute for the Study of Civil Society

30 December 2011

Media Information:
EMBARGO: 00.01 hrs, Tuesday 3 January 2012


EU's flagship green scheme siphons cash from consumers and employers to energy fat cats


Emissions Trading System shrinks economy but not Britain's carbon footprint


The EU Emissions Trading System (EU ETS) is siphoning billions from industry and consumers to plump up finance and energy fat cats, according a new Civitas report. The report reveals that, via the EU ETS, each EU citizen is effectively subsidising the power industry by £30 a year. [p. 13] In addition, the Government is adding more costs to UK families and businesses via the carbon price floor which sets a minimum price for carbon credits. This carbon price floor is expected to push another 110,000 British households into fuel poverty by 2016. [p. 61]


CO2.1, by David Merlin-Jones, is a comprehensive examination of how the EU ETS fails at its own goal of reducing carbon emissions. It details how carbon traders, banks, energy companies and the government are extracting billions from productive businesses and consumers via the EU ETS, while undermining the vulnerable UK economic recovery.


Ultimately, Merlin-Jones shows that the EU ETS is ineffective at reducing emissions. The strategy will do little for the environment until 2016 at the earliest, over ten years after its introduction. [p. 56] The result is more pain for the economy but without real relief for the environment:


The EU ETS is not the cheapest way to reduce emissions, nor the method to reduce them sustainably. [p. i]

The end of Heathrow?


The EU ETS is expanding to cover aviation from this year. CO2.1 estimates that:


  • A British family of four will be paying up to £130 extra for return trans-Atlantic flights by 2020.

  • The new emissions charges will cost airlines £1 billion annually, most of which will be passed onto other businesses and consumers through higher prices. [p. 44]

Britain, which accounts for 24 per cent of aviation in the EU-15, is particularly exposed to the scheme's expansion. [p. 44] Heathrow's status as an international travel hub is threatened by the arbitrary geographical limits of the EU ETS. This will affect all flights entering or leaving Europe, regardless of how little time they spend in EU airspace.


This means that airports placed outside the EU will gain a major artificial competitive advantage. For example, Geneva could receive Europe-bound travellers more cheaply from the rest of the world compared to EU competitors, potentially displacing Heathrow. This will result in lost jobs and missed business opportunities even as the economy faces another recession.


Merlin-Jones said:


'Perversely, the EU ETS will encourage flight paths to deviate from the shortest, most fuel-efficient, routes in order to avoid the EU's unilateral price hikes. Ironically, the overall result could be more CO2 emissions produced, not less.'


Flaws and frauds


Despite the heavy burdens on families and businesses, the EU ETS might still command support if it reduced carbon emissions and encouraged investment in renewable energy. But Merlin-Jones shows that the scheme is failing to achieve these aims. Instead of directing resources towards low-carbon technologies, the artificial market in carbon credits creates perverse and political incentives. Dodges include:


  • Energy companies are charging higher prices because of the EU ETS without actually cutting emissions. By the end of 2012, European energy companies will have generated between €16-€50 billion in windfall profits from their access to free EU ETS credits while simultaneously passing the non-existent cost on to consumers. [p. 15]

  • Harvesting carbon credits by deliberately generating additional emissions. The Clean Development Mechanism allows HFC-23 gas (normally a by-product of creating other gases for refrigeration) to be created purely for the purpose of destroying it in an environmentally friendly way. HFC-23 is 11,700 times more damaging than CO2. €2.8 billion worth of industrial gas credits have entered the EU ETS market, as entire businesses have sprung up, especially in China, dedicated to producing this gas. After intense pressure from industrial lobbyists, the scrapping of these credits was delayed from January to May 2013, so more credits can now flood the system. [pp. 17-27]

  • Exploiting the badly policed international market to engage in fraud. This includes 'phishing' for passwords that allow credits to be transferred to criminals, as well as selling fake and already spent credits. 90 per cent of all market volume was estimated to be fraudulent in 2009. €5 billion have been lost in 'carousel' VAT fraud since the EU ETS's creation. [p.33-35]

In addition, major banks are profiteering from the EU ETS. Originally supposed to act as intermediaries for covered installations, they run auctions to manipulate and dominate the carbon credit market.


David Merlin-Jones said:


'The EU ETS fails where it matters the most: in reducing global emissions. Some companies leave the EU to produce their emissions elsewhere, taking thousands of jobs with them. Others export their emission obligations onto the developing world to avoid their own responsibilities in a manner tantamount to neo-imperialism.'


No money for low-carbon energy


After the carbon traders have taken their profits, the British government is expected to receive in the region of £5 billion annually from the sale of carbon credits. [p. 37] However, the Government has explicitly refused to channel any of these funds towards environmental ends and lowering the cost of low-carbon energy production, even in the face of being asked to by the EU. This means that consumers face higher prices but with little prospect of the economy adapting to be less reliant on fossil fuels.


Tip over the trough


CO2.1 concludes that the EU ETS should be replaced, along with all other green levies, with a flat rate carbon tax applied equally to the same installations and CO2 emissions covered by the EU ETS. The flat nature of the tax will mean that costs will be lower for affected businesses and consumers than under the EU ETS, but will provide more overall funding for lowering the cost of alternative energy sources of between £7-£9 billion per annum.


The report argues that it is also necessary to acknowledge the additional costs of energy consumption that taxes on CO2 generate. This applies particularly to low-income families, many of whom suffer from fuel poverty. Using the carbon tax proceeds could eliminate fuel poverty through targeted investment within a year or two via the Warm Front scheme, a programme which supplies insulation to low-income households. [p. 112]


After this, all revenue should be intensively invested in reducing the cost of low-carbon energy to the point that it is cost competitive with fossil fuels minus carbon taxes. Merlin-Jones argues that this is the only way Britain can meet its ambitious environmental targets without sacrificing the economy.


For more information contact:


David Merlin-Jones, Director of the Wealth of Nations Project, 07949 811 032 and david.merlin-jones@civitas.org.uk


Notes for Editors


i. David Merlin-Jones is Director of the Wealth of Nations Project at Civitas and a Research Fellow in economics, energy and industrial policy.


ii. CO2.1: Beyond the EU's Emissions Trading System is available from the Civitas shop (RRP: £12.50) and by calling 020 7799 6677.


iii. Civitas is an independent social policy think tank. It has no links to any political party and its research programme receives no state funding.