Biomass-related issues and potential windfall profits in the European Union Emissions Trading System

Recent European Union Emissions Trading System (EU ETS) legislation amendments elaborate on biomass-related issues, by (1) introducing sustainability and greenhouse gas (GHG) savings criteria (Renewable Energy Directive (EU) 2018/2001; RED II-criteria) applicable in energy production and restricting the scope of the term “biomass” (Commission Implementing Regulations (EU) 2018/2066, (EU) 2020/2085 and (EU) 2022/388) and (2) excluding, during the forthcoming 5-year-long period 2026-2030 and subsequent such ones, stationary installations with GHG emissions mainly (over 95% as a, currently retrospective, preceding 5-year average) from biomass (Directive (EU) 2023/959, relaxing the previously holding 100% provision). Along with broadly planned, on-going decreasing share of free allowances (for GHG emissions) in favor of auctioning, concurrence of the above measures indicates room for windfall profits (contrasting the exclusion rationale) for installations that, being temporarily excluded, would not surrender potentially increased (due to combustion of materials not considered biomass, any more) emission allowances, while being deprived of (potentially curtailed) free ones. Based on the content of an explanatory numerical example in a non-legally binding Guidance Document (provided by the European Commission) on the Interpretation of Annex I (listing regulated activities) in Directive 2003/87/EC (EU ETS Directive), the present work considers issues in the above-mentioned framework, regarding such potential for installations with energy-intensive processes, using biomass-based raw materials and recovering energy from pertinent waste, as in pulp and paper manufacturing. Free allowance and verified emissions data from the (EU ETS-related) European Union Transaction Log combined with Carbon Dioxide emissions data from the European Industrial Emissions Portal (European Environmental Agency) indicate relevance of the above-mentioned, evidently unintended, inconsistency to a small number of pulp manufacturing installations, with potential for manifestation in additional EU ETS installations (especially ones that carry out combustion with rated thermal input exceeding 20 MW, not shielded against Carbon leakage).