The European CO2 market has made the fortune of the big polluters
Cement and steel companies have been able to exploit the European market for CO2 quotas to inflate their profits, despite high emissions. The Le Monde investigation
It is a thirty-year history that is worth billions of euros. Thirty long years that will not go down in the annals of the European Union (EU) as the most glorious in the fight against global warming. Three decades during which the most polluting industries of the Old Continent – steel, cement, oil, aluminum and others – received free CO2 emission quotas, a sort of "right to pollute" which should have been reduced over time, to encourage them to reduce their greenhouse gas emissions.
However, the scheme was quickly diverted from its original purpose and turned into a financial instrument that allows beneficiaries to increase their profits by reselling these allowances. Between 2013 and 2021 alone, according to estimates by the World Wildlife Fund, the major emitting industries pocketed €98.5 billion, and only a quarter of this sum (€25 billion) was earmarked for action for the climate.
The free allowance system, launched on 1 January 2005 and still in force, is set to disappear in 2034. On 18 April, the European Parliament adopted a new climate plan which envisages its gradual replacement by a "regulation adjustment mechanism carbon at EU borders”, this time with the aim of greening imports from sectors that emit the most CO2. By opting for a simpler mechanism, the EU has not officially issued its mea culpa. But that's what this is about.
“Legal” Embezzlement
As we revealed after eight months of investigation, with the financial backing of the Investigative Journalism for Europe (IJ4EU) fund, this system, which was supposed to be kind to industry, has been hijacked from its original purpose. We looked at the steel and cement industries in France and Spain, two of the biggest beneficiaries.
An in-depth analysis of the financial transactions recorded by these actors in the Emissions Trading System (SEQE-EU-ETS) confirms what some have long suspected: the companies have resold some of their free allowances for hundreds of millions of euros, sometimes billions. But unlike the massive VAT fraud that rocked the system in its early days, costing EU countries €6bn and leading to court convictions years later, the diversion in question is legal.
The story began at the Rio Summit in 1992. On that occasion, the idea of a carbon tax for the industries of developed countries was born, to make the economy more environmentally friendly. The initiative did not obtain the unanimous support of the Member States, in particular France blocked the decision. In 1997, the Kyoto Protocol brought the issue back to the table. Al Gore, vice president of the United States, found the idea interesting, but feared that this approach would not be approved by the US Congress. It was therefore necessary to develop a system more compatible with the capitalist model, in view of a possible rapprochement of transatlantic markets in the future.
The Old Continent therefore created a European carbon market, where producers could buy and sell allowances to regulate their CO2 emissions. “The EU created a market from scratch that had never existed before. It is the first time in the history of humanity”, underlines Thomas Pellerin-Carlin, director of the Europe program at the Institut de l'économie pour le climat. Today this market is the leading financial center of its kind in the world, although others are emerging, for example in China.
“There were a few fundamental questions raised right from the start. What model should be used to allocate shares that companies will trade with each other? Should they be given away for free or sold? Who will be covered by the mechanism? Will companies be able to keep quotas from one year to the next?” says Julien Hanoteau, professor of economics and sustainable development at the Kedge Business School in Aix-Marseille. A model is rapidly taking shape, even if it does not enjoy unanimous support. Every year, the European Union decides to allocate free CO2 quotas to industrial companies, based on the greenhouse gases they are estimated to emit in the following twelve months. One quota equals one ton of CO2.
Sale of CO2 allowances without compensation
After one year, industrial installations must surrender a number of allowances equivalent to their actual CO2 emissions. If they have emitted more CO2 than expected, they can buy additional quotas from companies that have not used all of theirs, according to the "polluter pays" principle devised by the creators of this market. Conversely, if they have emitted less CO2 than expected, they can resell the excess allowances they hold. Quotas do not have an expiration date. And when they are in excess, they become shares in the form of simple financial assets that companies can sell at will, for no consideration, or supplement by buying more on the market, if the price of carbon has fallen.
In its 2022 annual report, ArcelorMittal says it holds €154 million in “intangible financial assets” related to CO2 allowances as at 31 December 2021 and €691 million as at 31 December 2022, according to international journalist association Finance Uncovered with based in London, contacted for our research. According to the firm, this is the result of purchases that have "come to maturity", allowing it to bolster the assets side of its balance sheet by substantial amounts.
The pilot phase of the European free quota program began twenty years ago, in 2003. Distribution began tentatively in 2005, reaching cruising speed in 2008. The initial logic is surprising in retrospect. The more CO2 an industrial plant expects to emit, the more rights to pollute it receives. From 2008 to 2012, quotas are allocated on the basis of production years prior to the economic crisis. As a result, producers receive far more allowances than they actually issue. Some producers themselves immediately expressed reservations about the methods of the SEQE system, such as the Spanish cement producer Cementos Tudela Veguin and the French one Vicat.
“We told ourselves that we were on a slippery slope, that potentially we would have to return the excess stock granted. We were aware that it could not last, that someone would call it an end at some point,” comments Eric Bourdon, deputy general manager of the French cement producer, who for his part has chosen not to touch the excess quotas that had been distributed, a strategy at odds with that of its competitors. “We sold a little in the beginning but stopped very quickly. We now have 4.5 million tons of CO2 allowances. We will have to decide how best to use them,” he continues.
It is true that the allocation rules were changed in 2012 and again in 2018. But the abuses continued, as shown by the latest report on the state of the EU ETS, published in 2022 by the European Roundtable on Climate Change and the sustainable transition. The accumulated surplus of free allowances only stabilized in 2013, and even then at a very high level, the equivalent of 1.3 billion tonnes of CO2 per year. And only in 2017 CO2 emissions in all sectors began to decrease significantly.
“A market created from scratch”
For MEP Yannick Jadot (Europe Ecologie-Les Verts), who has been calling for the abolition of free quotas for years, the situation is bitter. “Public authorities have created a market from scratch, accepting from the outset all the intolerable excesses of the financialisation of the economy,” says the former Greens candidate in the 2022 presidential election. “The government could very well have recovered the money generated from the sale of quotas to compensate for polluting activities in an ecological way, lower the VAT or reduce the income tax. But this was not the choice made, instead leaving the companies free to operate”, adds Hanoteau.
The allowances are auctioned every morning at 11.00. In the beginning, the transactions represented a small million tonnes of CO2 per day. Since then, the market has become more sophisticated. Today it covers almost 18,000 plants and industrial companies, through banks, investment funds, brokers and a dozen trading companies, trade 20 to 30 million tons of CO2 every day, anticipating future changes in the carbon price.
“The market has become very attractive for investors. The price of carbon was initially 7 euros per tonne, rose to 24 euros in August 2008 and is now around 100 euros. Some predict it will reach €150 in 2030, and in the meantime, more than 80% of transactions are speculative rather than related to environmental issues,” says Ismael Romeo, director of SendeCO2, a Barcelona-based trading firm.
Ivan Pavlovic, energy transition specialist at Natixis (subsidiary of the Banque Populaire Caisse d'Epargne group), confirms: “Even if for the moment they are still a minority, the speculative investment funds specialized in carbon markets, which bet on these quotas , now they exist”. According to the British financial analyst firm Refinitiv, nearly 11 billion tonnes of CO2 were traded on the market in 2021, worth €683 billion.
"It's a black box"
The system soon proved to be faulty. Transactions are difficult to trace, even for industry experts. “The system is quite esoteric. At all levels, including the European Commission, no one has a global and unanimous view. It's a black box. Only the financial or industrial directors of the companies concerned know exactly what is done with these quotas,” admits the head of a CO2 trading company.
Sometimes, transactions aren't just justified for financial reasons. “They can also be inspired by climatic or political events. Energy companies, excluded from the free allowance system in 2013 because they used it to raise the price of electricity, are now forced to buy allowances at their own expense. They can resell some of them at the end of winter, if the temperature has been higher than expected and their CO2 emissions have therefore been lower. The same is true in the event of energy price inflation, such as in the summer of 2022, when gas prices skyrocketed,” points out Gregory Idil, trader at Vertis Environmental Finance, a Brussels-based company.
Be that as it may, companies are reluctant to disclose this information, which they consider sensitive for their industrial competitiveness. “Transactions are a reflection of economic activity. If a company says it has sold shares, it is potentially acknowledging that its production has decreased,” explains Barcelona-based trader Ismael Romeo. Also, not everyone is created equal when it comes to pollution rights. British Steel learned this the hard way. After getting rid of its free allowances to compensate for financial losses, it had to buy back the pollution rights in order to continue its activities and be allowed to emit CO2. Only in the meantime the price of carbon has skyrocketed. Eventually the company got overleveraged and, a victim of its speculations, ended up going bankrupt in 2019.
Opacity
The sale of shares is subject to the “trade secret” seal. This argument was brought forward by several companies that we interviewed to comment on the information contained in our database. In Spain, cement producers referred us to their employers' federation, Oficemen, for consolidated data on the sector. However, the federation refused. “Oficemen has no data. These questions are about the specific problems of the companies and they will be the ones to answer them,” a spokesperson replied. None of them did.
Another difficulty is that the financial transactions carried out by each of the 18,000 industrial sites that have benefited from free allowances are retrospectively published by the EU with a three-year delay. Currently, while free allowance allocations are known through 2022, the latest figures available for resales are for 2019. Even so, they don't tell the whole story. Since some plants have changed hands, it is impossible to reconstruct the history of transactions site by site. The European Union Transaction Logs (EUTL), which we worked on with the help of the database on the EUETS website. info, allow us to trace, by date and time, the exchanges of quotas between operators. However, they do not show the changes in ownership of industrial plants that may have occurred in the period studied (2005-2019), which contributes to the opacity of this market.
Swiss cement maker Holcim declined to comment on the figures, arguing its scope changed after its merger with Lafarge in 2015, which resulted in the new entity selling off cement plants. The same is true of Germany's Heidelberg Materials (formerly HeidelbergCement), which has made major changes to its network of cement plants in Europe, following the 2016 acquisition of Italy's Italcementi and its French subsidiary Ciments Calcia.
Spain's Cementos Portland Valderrivas became a leader in the Iberian Peninsula when it took control of Uniland in 2006, but only regained full ownership of the company in 2013, after selling its Cementos Lemona subsidiary to Ireland's CRH. Its competitor, Cementos Molins, points out that in 2013 it acquired a plant from Mexican Cemex in Barcelona, which it says "distorts" its commercial balance of shares. The Brazilian colleague Votorantim Cimentos is in the same situation, having entered the Iberian market only in 2012 by taking over the sites of the Portuguese Cimpor.
"Excess" companies
One thing is certain: a group like ArcelorMittal has always received more free allowances than those emitted in CO2. And this is also true today. The steel giant sold large quantities of allowances in 2008 and again in 2011 and 2012. However, for reasons of financial optimization, it also bought back some in some years when the carbon price was declining. In total, according to EUTL records, between 2005 and 2019 the steel giant sold 3.7 billion euros of shares and bought 1.8 billion, generating a margin of 1.9 billion euros . Contacted by Le Monde, ArcelorMittal France could not confirm these figures.
Also according to EUTL records, Holcim had a surplus of pollution rights until 2017. It sold off a lot of stakes between 2008 and 2012, before merging with Lafarge, which also sold off a lot of stakes. In total, the two merged companies have reportedly sold €1.3 billion and bought €339 million to date, resulting in a positive balance of €986 million. The amounts are buried in the group accounts and are impossible to find as such in the annual reports. “Transaction data is company data that we do not disclose,” says Lafarge France.
Their competitor, Heidelberg Materials, was profitable until 2016. This major player in the European cement industry, present in France with the Ciments Calcia brand and in Spain with the Sociedad Financiera y Minera cement plants, would also dispose of a significant of shares after the 2008 financial crisis, for a total of 732 million euros, but stopped this practice in 2016 and also bought 364 million euros in value, making a profit of 368 million euros. According to a spokesman, the German company "unfortunately does not have this information".
In Spain, Cementos Portland Valderrivas, a subsidiary of public works giant FCC, is a major contributor to CO2 emissions. From 2008 to 2012, it received a disproportionate volume of polluting rights each year, far out of proportion to its actual emissions. The surplus only ended in 2021. He is said to have sold some of these rights, pocketing €288m, and bought €11m, making a profit of €277m. The company declines to comment on these figures. “Our policy is not to participate in journalistic investigations,” they told us.
“Save the Furniture”
However, some of these transactions can be found in the annual accounts filed with the Companies Register by its subsidiary Cementos Alfa. Until 2021, a line explicitly titled "sale of greenhouse gas emission rights" appears in the financial statements of this company, confirming that the allowances are indeed considered an asset and that they are managed by the company's finance department, and not from the environmental or sustainable development department.
“Some companies sold massively in 2012, 2014 and 2018, which correspond to the introduction of stricter criteria for the allocation of free allowances or to periods in which carbon prices were high,” notes Florian Rothenberg, an analyst specializing in markets of carbon at the ICIS consultancy firm.
On the ground, evidence confirms that the financial storm of 2008 precipitated the sale of shares. “At the time, our executives' only concern was to save the furniture. It was in this climate of crisis that some cement factories began to sell their pollution rights, which they no longer needed due to the drastic drop in activity. Since then, the European and Spanish regulations have changed a lot, to encourage a gradual reduction of carbon emissions from the industry and discourage speculation on the CO2 market”, explains Daniel Lopez Caro, representative of the industrial federation of the UGT trade union in the cement.
Absolute secrecy
Several French and Spanish trade unionists have said that staff representatives attending meetings with company management are bound to absolute secrecy on the matter. Confidentiality agreements are signed which nobody dares to break, for fear of being taken to court, as has already happened at ArcelorMittal. A source contacted by Le Monde, who had access to the accounts of one of the companies concerned, confirms that this practice does indeed take place: “In 2022, our executives sold shares for tens of millions of euros. These sums are used to increase the company's net profit when the year was average.
“I know how much my company pocketed by auctioning free allowances, but I swore to the works council that I would not divulge the figures. All I can say is that the money was used to make ends meet for between 6 and 10 million euros a year, when the economic situation was difficult”, confides a Spanish trade unionist, under the seal of the secrecy. Another unnamed union source confirms this practice among steel producers: “At the time of the crisis, in Florange, ArcelorMittal received free allowances even if the site was closed. It was a hoax, because the money wasn't being used to reduce CO2 emissions or invest in clean energy. It was an unexpected win of money which obviously was seized on the fly”, confides the author.
“The figures were given to us orally and, most of the time, we didn't say anything, because the management told us that by selling the shares they had saved our jobs. So we turned a blind eye. We preferred not to know,” says a former employee of Holcim Spain. “Everyone knows where the money has gone, but unfortunately it is impossible to prove the direct link between the sale of the shares and the dividends paid to the shareholders of these companies,” complains Judith Kirton-Darling, general secretary of IndustriALL Europe, the European trade union of industrial workers. 'industry.
For Sam Van den plas, campaign director of Carbon Market Watch, an NGO that has been following the issue of free quotas for several years, the mystery is over: “We finally know what companies have done with their rights to pollute. Until now we had only hypotheses”, he says satisfied, referring to a study by CE Delft which, in 2016, estimated that the sums involved in the sale of free allowances amounted to several billion euros.
For Yannick Jadot, the free quota system is "beyond moral judgement". “This story is scandalous, as is the possibility of buying pollution rights in African countries. It is a way to evade responsibility and falsely practice decarbonization,” he criticized. “Companies have twisted the concept of free quotas to make a profit, and this raises an ethical question. At a time when we're trying to save the planet, some are lining their pockets. It's indecent,” says Ana Isabel Martinez Garcia, a steel industry specialist at Syndex, an accounting and consulting firm. Indecent, but legal.
(Excerpt from the press release of eprcommunication)
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/energia/acciaio-cemento-mercato-co2-unione-europea/ on Sun, 04 Jun 2023 05:42:36 +0000.