ETUC position on the revision of the EU Emissions trading directive

Brussels, 05-06/12/2007

Preliminary remarks

1. This position paper represents the contribution by the ETUC and its member organisations to the consultation on the revision of the directive establishing a European CO2 emission trading scheme (directive 2003/87/EC). The new Directive will apply for the trading period starting in 2013.

2. The ETUC recalls its support for a unilateral independent EU commitment to reduce its GHG emissions by around 25% by 2020 and by around 75% by 2050 (resolution adopted by the ETUC Executive Committee in October 2006).

3. The European cap and trade system is considered by the European Commission to be the keystone of the European mechanism for combating climate change by achieving the ambitious objective of an autonomous reduction of 20% in greenhouse gas emissions by 2020 decided by the European Council in March 2007. It covers close to 11.500 installations in the 25 Member states, in the power and heat generation industry and in selected energy-intensive industrial sectors: combustion plants, oil refineries, coke ovens, iron and steel plants and factories making cement, glass, lime, bricks, ceramics, pulp and paper.

4. The ETUC considers that the EU ETS can play an important role in limiting greenhouse gas emissions in line with the ‘polluter pays’ principle, while minimising the global cost of the reduction effort. However, it is not a magic bullet. In itself, the carbon market is not in a position to stimulate investments in renewable energy sources or in energy-saving projects, which are highly labour-intensive sectors. This makes it indispensable to mobilise all the public instruments, such as regulation, taxation, subsidies and R&D, taking into account their combined impact in social terms, notably on Europe’s workers.

5. It is also crucial to adopt stronger measures for the sectors not covered by the ETS and whose emissions are still rising, so that the burden of meeting the commitments does not weigh disproportionately on the ETS sectors and the taxpayers (through the purchase of Kyoto credits by governments).

6. The first application phase of the EU ETS (2005-2007) has been described by the Commission as a phase of ‘learning by doing’. Experience has shown that while the EU ETS has made it possible to include the cost of CO2 in the decisions taken by businesses, it has not so far delivered reductions in emissions, because of the over-allocations in quotas granted by the Member States to industry. The decisions by the Commission on the second application phase (2008-2012) indicate a stronger concern to respect the Kyoto protocol, which the ETUC approves.

7. In the long term, the competitive advantage will indeed fall to the industries that have developed very low-emission technologies; but European industry needs to be supported in international competition while it is investing in the technologies of the future. In the view of the ETUC, the major issue in the EU ETS is to find a balancing point which would make it possible to achieve a significant reduction in emissions without, during the transitional phase, imposing an excessive burden on European industries which are heavy energy users and are exposed to competition from major global rivals which have not deployed efforts equivalent to those by the EU to control their emissions.

8. Therefore, we have to accept the idea that the implicit price signal provided by the EU ETS should be differentiated by ETS sub-sectors sector, depending on their exposure to international competition and the risks for employment in the European Union.

9. Unless we are careful, the redistributive impacts of the EU ETS will be significant, or even untenable for some categories of workers, some sectors of the population or some economic players. This is all the more true as the ETS will evolve towards auctioning of emissions permits. This makes it essential for the social consequences to be correctly anticipated and monitored whether it be in terms of employment and closures, regrouping and relocation of businesses or impact on the price of energy for very low-income households.

10. This implies that the trade union organisations, which have a strong presence in the sectors covered by the ETS, should be actually involved in the ETS decision-making and monitoring process, as they are in some Member States. In Spain, for example, Tripartite dialogue round tables involving employers, trade unions and the government have been set up in the framework of the implementation of the Kyoto protocol.

11. As part of closer harmonisation of the ETS at EU level, and in accordance with Article 138 of the Treaty, the ETUC calls upon the Commission to set up a European platform for tripartite social dialogue on the European emissions trading scheme bringing together European social partners (employers and trade unions) and the relevant Directorates-general. The platform should be composed of an inter-sectoral Platform and sectoral platforms for each industrial sector included in the ETS. The platform would aim to prevent, avoid or reduce the potentially adverse social effects and fully exploit the social opportunities that could result from implementation of the ETS Directive, in particular those related to competitiveness and employment.

12. Moreover, the ETUC proposes the introduction of a ‘European low-carbon economy adjustment fund’, to be financed notably by a proportion of the income from the auctioning of emission permits, the object being to help workers affected by the transformations associated with the transition to a very low carbon emission society, to assist them with their re-training and job search efforts. This fund would build upon the experience gained from the operation of the Globalisation adjustment fund. This same mechanism might be used for adaptation to the effects of climate change, as suggested by the Green Paper on adaptation to climate change in June 2007.

13. Involving workers and their representatives in decision-making and guaranteeing that workers losing their jobs because of climate change mitigation measures will be offered other employment options are preconditions for achieving the ambitious emissions reductions targets for 2020 adopted by the European council in March 2007.

Principal recommendations for the revision of the EU ETS

14. The ETUC considers that the revision of the EU ETS directive must meet the following key objectives:

- To make the mechanism more effective to significantly drive down greenhouse gas emissions, in line with the commitments entered into by the European Council in March 2007;
- To harmonise the allocation of the quotas in the European Union, to limit the risk of distortions of competition and thus of social conditions;
- To increase the transparency of the operation of the allowances market and effectively involve the trade union organisations in the decision-making and monitoring process;
- To limit the risks of relocation of industries which are heavy energy users.

Maximum harmonisation tied to new European solidarity and social consultation mechanisms

15. The current operation of the EU ETS, which is highly decentralised at the level of the Member States in terms of quota allocation, entails risks both for the environment and for employment, since it tends to encourage businesses operating at the European level to pit European employees against each other in the search for the solution with the lowest environmental cost.

16. Accordingly, the ETUC favours maximum harmonisation of the EU ETS at European Union level, provided that it is accompanied from the outset by:

a. a formal social participation mechanism enabling EU social partners to build consensus on the EU ‘burden sharing’ and on the social consequences – for employment, wage-earners and consumers alike – but also to consult on the method and on the regulatory and financial resources, the implementation and the follow-up (see § 10).

b. new ‘solidarity’ mechanisms at European Union level to help the sectors, the regions and the workers most seriously affected to make the transitions necessary (see § 11).

17. In light of the above, the ETUC is in favour of an approach whereby the global quantity of allowances authorised for the sectors covered by the EU ETS, as well as its distribution by major sectors (energy production, industry, aviation) are defined from the outset at European Union level. This ‘single ceiling’ option for the EU seems better suited than the current ‘separate caps per Member State’ option to guarantee fair treatment of the industries within the EU at a time when it will be necessary to step up efforts at emission reductions.

18. The single ceiling should be strict enough to contribute significantly to the ambitious emissions reduction target agreed upon by the EU for 2020.

19. Under this ‘single ceiling’ option, criteria to be applied for EU burden sharing (EU-wide ETS cap setting and Member State allocation) should be simple and transparent, and account for a mix of: a) adoption of best available technologies in the industrial and electricity sectors (ETS) b) convergence in the per-capita domestic emissions (mainly residential and transport) c) GDP per capita. In our view, this approach would allow for an equitable sharing of the social costs of the mitigation commitments between workers in different economic sectors while accounting for differences in Member states' 'ability to pay'.

Allocation mechanism

a. The ETUC would support a combination of free allocation according to benchmarking principles – based on Best available technologies – and selling of allowances – by auction or on the CO2 market, provided that the determination of the share of each mode accounts for the impact on European workers and is determined through consultation of trade union organisations, and implementation is progressive as from 2013. Such allocation scheme should be harmonised for the industrial sectors throughout the EU in order to avoid distortions of competition and social conditions.

20. However, there are few experiences in the use of auctions that are directly comparable with the role envisaged in the EU ETS. The period running until 2013 needs to be used profitably in order to test the auction mechanisms which will be set up voluntarily by the Member States and provide a collective learning dynamic. With the prospect of 100% implementation, where any mistake would be particularly expensive, the implementation arrangements and their impacts will need to be studied extremely carefully, because they will largely determine whether or not the objectives being pursued are achieved.

21. Should auctions become the general method, the ETUC deems it necessary to create an organisation to regulate the carbon market at European level, under the aegis of the Commission, for the sake of ensuring the optimal operation of the market and notably avoiding excessive price volatility and the manipulation of the auctions by the bigger players.

Differentiated allocation approaches for sectors

22. For the sake of reconciling economic development, emission reduction and the maintenance of industrial employment in Europe, the ETUC recommends that the allowances allocation be the subject of a different approach per sector, taking account of their varying degrees of exposure to international competition, the risks in terms of employment and their ability to pass on the cost in the price. The study conducted by the ETUC shows in particular that some major energy-consuming industries, broadly globalised, such as the iron and steel industry, can use the EU ETS to accentuate the process of relocating labour or freezing their investments in Europe if at the same time their competitors do not bear the same constraints on their carbon emissions. This could also lead to an increase in global emissions (the ‘carbon leakage’ phenomenon).

23. For the electricity and heat production sector, as this sector to a great extent escapes from international competition (with the exception of imports from Russia and Ukraine) and is able to pass on the cost of CO2 to the consumer, the ETUC takes the view that auctioning or selling part of the emission permits to this sector on an experimental basis would provide the governments with the public funds necessary to substantially strengthen current public policies geared towards energy efficiency and climate change mitigation.

24. For the few sectors subject to international competition (notably iron and steel, cement, aluminium), a full allocation by auction is impracticable as long as the EU competitors do not bear similar costs associated with their emissions. For these sectors, the ETUC backs free allocations according to benchmark principles. The reference to the best techniques available would be used to distribute a certain level of allocation free of charge. Installations failing to comply with the reference to the benchmarks would have to purchase permits. The references to the benchmarks will need to be revised regularly to take account of technological progress.

A border adjustment mechanism to compensate for competitiveness impacts

25. Given that such a mechanism would not be enough to eliminate the losses of competitiveness for the electricity-intensive sectors, the ETUC urges the Commission to introduce compensation measures, such as Border adjustment mechanisms. [[Directive 2004/101/EC of 27 October 2004 amending Directive 2003/87/EC establishing a scheme for greenhouse gas emission allowance trading within the Community, in respect of the Kyoto Protocol’s project mechanisms]]Such a mechanism would be required as long as the major competitors of the EU industry, as well as power producers in the competing countries, are not subject to a comparable carbon constraint. The fact that an importer is part of an international sectoral agreement to reduce carbon emissions is not sufficient in itself to eliminate the competitiveness impact. The importer should also afford increases in electricity prices similar to those paid by industry in Europe.

Utilisation of the income from the paid-for quota allocation

26. The method of allocation of the income generated by the sale of the quotas is a crucial question, insofar as it links into the question of tax reforms, and it determines the environmental effectiveness of the system and its social acceptability. It should therefore be the subject of in-depth consultation with the social partners.

27. For its part, the ETUC calls for a significant percentage of the income to be fed into a ‘European low carbon economy adjustment fund’, intended to help workers affected by the transformations associated with the transition to a very low carbon emission society. This fund would have the same status and the same operating arrangements as the regional policy funds.

28. The rest of the income should be devoted first and foremost to the fight against climate change – by supporting the investments designed to achieve the long-term decarbonisation of the European economy – and to the promotion of employment –by decreasing the weight of the tax burden on salaries with regard to the other factors without undermining the level of social protection.

Scope of the directive

29. The ETUC supports the inclusion of the aviation sector in an emissions quota trading system, as proposed by the Commission. Such a system must apply the same treatment to airlines starting from or flying into European airports, with no distinction as to nationality. The permit allocation should be made through auctioning, given the fact that airlines are able to pass-on to a large extent compliance costs to customers.

30. As the price of CO2 permits in the EU ETS is likely not to be high enough to drive significant emissions reductions, we support the introduction of additional measures, such as kerosene taxation or VAT on airline tickets.

31. The maritime transport sector should likewise be covered in a similar mechanism. Emissions from this sector are twice those of air transport and could increase by some 75% over the next 15 to 20 years. Europe controls 40% of the world’s fleet.
32. In the case of these sectors, attention needs to be paid to improvements in working conditions and the application of labour law in order to prevent any downward pressure on wages and working conditions designed to offset the added cost linked to emission reduction.

Utilisation of the flexibility mechanisms (clean development mechanism or CDM, joint implementation or JI)

33. The possibility of using the credits from CDM or JI projects to offset the quotas on the carbon market plays a major role in reducing the cost of emission reductions in Europe and disseminating more effective environmental technologies in the emerging and developing third countries. But it must not favour transfers of investment outside the European Union or excessively maintain the market price of carbon at an excessively low level. Over the long term, there is likewise a risk that the delay in upgrading European businesses might translate into a competitive disadvantage when the carbon constraint is reinforced.

34. The ETUC accordingly reiterates its position to the effect that flexible mechanisms cannot constitute anything more than a complementary instrument alongside local measures to deliver on the European Union’s emission reduction pledges. The use of CDM and JI credits must be limited, with a cap which could be defined at European level.

35. The credits from flexibility mechanisms must come only from projects which deliver genuine benefits in terms of sustainable development, both for the environment and for the populations and workers in the host countries. This objective is established by the Directive introducing the link between the emissions trading scheme and the project mechanisms , which emphasises in its preamble that ‘corporate environmental and social responsibility and accountability should be enhanced in accordance with paragraph 17 of the Plan of implementation of the World summit on sustainable development. In this connection, companies should be encouraged to improve the social and environmental performance of JI and CDM activities in which they participate’.

36. Yet it is a matter of regret that the social performances of the projects are not taken into account either by the CDM executive committee at international level, or by the Member States in the EU with the notable exception of Belgium. The experience of Belgium shows how the flexible mechanisms can be made to provide both environmental additionality and social progress in developing countries.

37. The ETUC therefore recommends that the CDM and JI projects should be systematically subjected to a procedure of approval by the national public authorities and that the list of evaluation criteria be set at the EU level in order to ensure a level playing field across Europe. The list of criteria should include:

a. the project promoter’s pledge to respect the principles of the OECD's guidelines for multinationals, the eight ILO basic conventions , [[Freedom of Association and Protection of the Right to Organize Convention, 1948 (No. 87); Right to Organize and Collective Bargaining Convention, 1949 (No. 98) ; Forced Labour Convention, 1930 (No. 29) ; Abolition of Forced Labour Convention, 1957 (No. 105); Discrimination (Employment and Occupation) Convention, 1958 (No. 111); Equal Remuneration Convention, 1951 (No. 100); Minimum Age Convention, 1973 (No. 138); Worst Forms of Child Labour Convention, 1999 (No. 182) Convention 155 on Occupational Health and Safety and Convention 169 on Indigenous and Tribal Peoples. ]]

b. Social sustainability, covering employment (number of jobs created, skills development, quality of employment), equity and access to essential services such as energy services.

c. The involvement of the trade union organisations in the projects approval procedure.


The reinforcement of the EU ETS, which will be crucial in achieving the EU’s ambitious objectives for the post-Kyoto period, demands harmonisation at EU level and the introduction of European social negotiations – both global and sectoral – to correctly address its redistributive impacts on employment. The ETUC and its member organisations are ready to play their full part in this process.