EU's flagship climate instrument used to subsidise coal in Central and Eastern Europe

The EU's carbon market rules allow Central and Eastern European Member States to invest up to €12 billion in coal powered energy production. As representatives of the EU Member States are due to discuss the EU ETS this Wednesday, the new publication "Fossil fuel subsidies from Europe's carbon market" adds momentum to the need to overhaul this policy.

Under a provision referred to as "Article 10c" in the EU Emissions Trading System (EU ETS), low-income Member States can grant free pollution rights to their electricity producers until 2019. This is permitted on the condition that they invest at least the equivalent monetary value of those allowances in diversifying and modernising their electricity generation.

"The experience to date demonstrates that this provision has so far not resulted in the diversification of the energy mix in lower-income Member States. Quite the contrary, it will lock them in carbon intensive energy production and investment uncertainty. Europe's carbon market is hence being used to subsidise coal power, including investments in the second largest fossil-fuel power station in the world," says Urska Trunk, Policy Officer at Carbon Market Watch.

In 2013, only about 10% of the investments through Article 10c were related to clean technologies or the diversification of the energy mix. An overwhelming 90% of investments benefitted the upgrading and retrofitting of existing (fossil fuel) infrastructure.[1] The majority of Article 10c investments did not lead to a more diversified energy mix in countries such as Poland and the Czech Republic that are highly dependent on coal.

"Continuing to allocate free pollution permits is contradictory to the EU's transition away from fossil fuels," says Joanna Flisowska, Coal Policy Coordinator of Climate Action Network Europe. "To turn carbon trading into a tool that helps end our addiction to fossil fuel, especially coal, polluter handouts must end, and the price of carbon must increase. This will boost investments in renewables and energy efficiency."

In addition to supporting carbon-intensive energy systems, Member State analysis has exposed other shortcomings, such as little or no time for the public to provide comments on the government's investment plans.

Markus Trilling, EU Policy Officer at CEE Bankwatch Network explains: "Detailed information on the investments is often lacking and oversight by third parties is very difficult if not impossible. This makes it very hard to assess the effectiveness of the investments and their compliance with the EU's clean energy objective".

Despite concerns from civil society that Article 10c has not had desired effects, the EU ETS proposal for the next trading round from 2021-2030 continues to allow lower-income states to give free allowances to their power sector.

"Decision makers must ensure that Article 10c moves away from subsidizing coal to becoming a tool to diversify the energy mix and take bold steps needed to reduce energy poverty and import dependency of emerging European countries," Urska Trunk concludes.

Media contacts

Urska Trunk, Policy Officer, Carbon Market Watch
Tel: +32 487 12 96 17
urska.trunk AT carbonmarketwatch.org

Kaisa Amaral, Press Officer, Carbon Market Watch
Tel: +32 485 07 68 90
kaisa.amaral AT carbonmarketwatch.org

Markus Trilling, EU Policy Officer, CEE Bankwatch Network
Tel: +32 2 893 10 31
markus AT bankwatch.org

Notes to editor

Recommendations by Carbon Market Watch and CEE Bankwatch Network to reform Article 10c after 2020:

- Ensure that all investments are selected based on a transparent process through a competitive bidding process with full accessibility of relevant documents.
- Introduce selection criteria for the ranking of projects so that no investments in coal production are eligible and investments in energy efficiency and sustainable renewable energy sources are prioritized.
- Base the investment selection process on open consultation that provides for public input and takes the comments raised by stakeholders fully into account.
- Allow all interested parties to participate in the competitive bidding process, including non-ETS operators, such as renewable energy companies to ensure it is non-discriminative.
- Guarantee that investments are additional so that Article 10c does not support projects that would have been undertaken regardless of the option of derogation.

[1] See 2015 Commission's Impact Assessment (p.133)