Ireland prepares to play dealmaker on EU’s biggest climate fight of the year

Some countries desperately want to gut the Emissions Trading System, others are determined to protect it. Ireland has its work cut out.

By BEN MAKUCH

^{Dan Kitwood/Getty Images}

BRUSSELS — The European Union’s most important climate policy is up for review this summer, and Ireland must be the go-between in a major ideological contest among member countries.

The European Commission will release a hotly anticipated review of the Emissions Trading System in mid-July, barely two weeks into Ireland’s presidency of the Council of the EU. 

Months of arguing will follow among member countries over how far to water down the 20-year-old policy, a cap-and-trade scheme designed to reduce the emissions of the EU’s most polluting industries by making them pay for each ton of carbon they emit.

Already, the review has become intensely political. As soon as U.S. and Israeli bombs fell on Iran and oil and gas prices skyrocketed, a gang of 10 EU member countries — led by Poland, Italy, Czechia and Austria — released a letter characterizing the ETS  as a plague on household energy bills, a business killer and a constrictive mandate for European decarbonization.

Since then, other countries have piled in. On the moderate side, France, Germany, Spain and others are now also arguing the ETS requires reform so the private sector can catch its financial breath amid market uncertainty. But Sweden, Denmark, Finland and the Netherlands — among the biggest defenders of the ETS — kept their signatures off a pair of critical papers to the attention of the Commission in May.

Heavily polluting industries like steel, cement, aluminum and chemicals — all subject to the ETS — have publicly committed to decarbonizing. But they, too, have lobbied against parts of the ETS and many make no secret of their dislike of it in the backrooms of Brussels.

Ireland stands as one of the relative neutrals in the ETS debate. Darragh O’Brien, Ireland’s minister of energy and transport, told POLITICO that’s because his country is not a heavy industrial nation and less affected by the ETS.

“There’s no baggage coming into this,” O’Brien said about Ireland’s history with the bloc’s carbon pricing framework. “So I think, we will operate as an efficient, honest broker through this. And it’s important for industry, so we need to advance it as far as we can over the course of the six months.”

But the biggest question in the European capital is: What will the Commission actually end up doing to satisfy the naysayers and the ETS-purists, alike?

Walking the line

If you listen to the Commission’s party line on what it can do, it will say the fundamentals of the ETS must remain, but still concedes changes are needed. Climate Commissioner Wopke Hoekstra has signaled at least three main things that may appear in the July review.

Firstly, he’s repeatedly mentioned in public, including at a POLITICO summit in early June, that the Commission was considering mandating a larger percentage of ETS payments — last year, annual revenue hit €43 billion — be delivered straight into the pockets of businesses to help pay for decarbonization.

“A system where more of the money is filtered back to use for the transition of the hardest-to-abate sectors and of cleantech — intellectually [that] makes a hell of a lot of sense,” Hoekstra told a roundtable of reporters in May. 

An aerial view of the Tata Steel plant in Wijk aan Zee, Netherlands. | Pierre Crom/Getty Images

Over the course of its 20-year lifespan the ETS has brought in more than €250 billion from selling allowances to industry, with annual yields creeping higher over time as fewer free allowances are doled out. Around 20 percent of those billions goes to EU programs like the Social Climate Fund and the Innovation Fund, but the remaining 80 percent funnels to the coffers of member countries to be spent on a broad range of energy and climate programs.

Clawing some of that money back from member countries to give to industry would be a tough sell: Finance ministers across the bloc have come to love the money coming from the ETS, and in places like Poland — where defense spending is close to 5 percent of gross domestic product — that revenue won’t be given up easily.

Then there’s the question of free allowances. Many countries and industries say the EU executive’s latest calculations of how many free allowances heavy industries receive are flawed, and are calling for more generous treatment. The Commission has firmly pushed back on this.

Under current rules, the overall cap on emissions under the ETS is due to tighten annually until it reaches zero by 2039 — essentially meaning companies will have to stop emitting altogether at that date. But at a public roundtable in May, Mette Quinn — deputy director for carbon markets and clean mobility under Hoekstra — suggested the EU executive would “reduce the speed” of the ETS by extending the cap past the 2039 deadline, and that it expected “allowances far into the [2040s] under the ETS.”

During the roundtable, the Commission also displayed a slide clearly stating: “The review will aim to find a more realistic trajectory for free allowances.”

Whether or not all these changes make it into the review remains to be seen. Two EU diplomats and two other people familiar with the inner workings of the Commission, granted anonymity to reveal sensitive information, said first drafts would be internally making the rounds as early as June 19. 

O’Brien is keen that his country has the goods to find consensus on the ETS across the bloc, but much will depend on exactly what the Commission proposes.

“The first milestone date is getting the review published,” O’Brien said.