The United Kingdom is making huge profits from its emissions trading under the ETS, but not ploughing the revenue back into green investment.
It has earned more than one billion euros from the auction of EU Allowances since its first auction in Phase II of the EU Emissions Trading Scheme (EU ETS) in November 2008, according to a report by carbon offsetting company Carbon Retirement.
Only Germany earns more from these auctions.
The revenue goes straight into the Treasury's general pool, and despite European Commission proposals that at least half of auction revenues should be used to help reduce greenhouse gases, develop renewable energies and clean technologies, and shift to low-emission forms of transport, the UK has so far refused to do so.
An attempt by the European Parliament to force EU member states to comply when passing the Aviation EU ETS directive was rejected by the EU Council of Ministers.
Revenues raised through allowance auctioning are set to rise dramatically in Phase III, with aviation joining the scheme in 2012 and additional greenhouse gases and manufacturing processes being covered from 2013.
At a carbon price of €15 per tonne, the UK stands to generate €328.5 million this year. Using Carbon Trust estimates of a price of €28 per tonne in 2013 and €39 per tonne in 2020, the UK would earn €32-64 billion over the eight years of Phase III.
Earmarking this revenue for green projects works well elsewhere in the EU. Germany currently earmarks €400 million of auction revenues annually, with €280 million set aside for national projects and €120 million for international projects. The report says other EU countries also earmark environmental taxes for various related initiatives.
Energy companies pass on the cost of carbon to their customers in the form of price rises, as their own profits soar. Carbon Retirement comments that as a result the most vulnerable members of society are being tipped into fuel poverty, and the trend is likely to continue.
“Earmarking revenues from EU Allowance auctions for subsidised community energy generation or energy efficiency in social housing would be a very sensible way of balancing out the potential adverse effect of the EU ETS on this group.”
The money could also be used to help finance the Government's proposed Green Investment Bank.