Pervasive EUAs free allocation: the case of the steel industry

Sectors subject to international competition still benefit from free allocation of EU Allowances in Phase III of the EU ETS market. Herein we show that those free EUAs benefit the less efficient firms in terms of emissions and, by doing so, they create overallocation profits for the market leaders. This is particularly striking in the steel industry which is very concentrated with one firm producing approximately 34 per cent of the market alone. To show this, we perform a frontier analysis and show that most free permits are allocated to most polluting firms. Hence, we highlight that by protecting the EU steelmakers from international competition, free EUAs lead to a trade-off between the EU climate policy and the competition policy.