Excessive EU Carbon Credits Result in Big Profits

April 13, 2009

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European steel companies were awarded far more carbon credits than they needed and have reaped a windfall in profits. Steelmakers received a surplus of credits worth about $1.2 billion, based on 2008 carbon prices, according to Reuters.

Some critics of establishing a cap-and-trade system in the United States have pointed to the excessive profits created by awarding free credits at the onset of such a system. To counter the criticism, President Obama’s original plan called for all permits to be auctioned. Facing a recent backlash from industry, the White House has reportedly said it is “flexible,” Reuters reported. The plan also is being fought by auto-manufacturing states.

In Belgium, a steel plant owned by ArcelorMittal received more than $130 million in carbon emissions permits it didn’t need. The company is free to sell the permits on the carbon trading market, or save them for future use.

Because of the surplus, carbon credits have been trading at depressed prices, although they recently rallied. A recent UK report suggested that carbon credits need to trade at eight times their current price in order to have any real effect. Obama’s plan presumes a 2012 carbon price of $13.70.

The surplus in steel plant emissions permits is due to five percent lower production related to the economic downturn, steelmakers say. However, EU data shows that the steel sector’s emissions barely changed from 2007 to 2008, Reuters reported.

After EU power plants received major windfalls from excess permits, the EU stated that most utilities will have to purchase all permits they receive starting in 2013.

It is speculated that steel plants, however, will continue to get free credits, on the argument that they face higher costs than competitors outside of Europe.

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