Commission faces revolt over 'carbon leakage' plans [fr] [de]

Background

On 23 January 2008, the European Commission proposed to revise the EU emissions trading scheme (EU ETS; see EurActiv LinksDossier) for the period 2013-2020, setting out the EU's main instrument to meet its objective of reducing greenhouse gas emissions by 20% by 2020 compared to 1990 levels.

The proposal, part of a wider climate and energy 'package' of legislation, suggested capping emissions to 21% below 2005 levels by 2020 and expanding the scheme to include more industrial sectors.

Under the revised scheme, electricity producers will need to buy 100% of their CO2 emission permits at auction by 2020, for example.

But heavy industry, including the cement, steel, aluminium and chemical sectors, argue that a tightened ETS would inflate their costs to such an extent that they would be forced to move their factories and jobs beyond the EU's borders, leading to a 'leakage' of CO2 emissions without any environmental benefits (see EurActiv LinksDossier).

More on this topic

As part of the revision of the EU's emissions trading scheme (EU ETS), the Commission was required to compile a list of sectors and sub-sectors that are deemed to be at risk of carbon leakage, that is, relocation to third countries without any carbon constraints. These sectors will continue to receive their emissions allowances for free in the post-Kyoto Protocol period until 2020, up to a benchmark of the best-performing 10%.

The EU executive presented the preliminary results of its exercise at a stakeholder meeting on 29 April, confirming that the lists would be made available for comment in June. 

Chemical sector unhappy

The chemicals industry has expressed its discontent with the preliminary tables. Many sub-sectors fulfilled the Commission's key criteria for qualifying as exposed to carbon leakage, namely exposure to international trade and major cost increases as a result of the EU ETS. Nevertheless, the industry said incomplete assessments had left some vulnerable sub-sectors subject to auctioning.

Cefic, which represents the European chemicals industry, argued that a more sophisticated method was needed to judge the level of exposure of chemicals firms, which have many users further down the production chain.

"Everything that impacts the chemical industry will impact equally downstream users and end consumers. In short, a competitive European economy is vitally dependent upon a competitive chemical industry," Cefic wrote in a statement. It added that as the industry is responsible for a quarter of European research and development spending, not protecting it would be a blow to European innovation.

According to Cefic, the Commission's assessment has not given enough consideration to the higher electricity prices that are passed through to industrial customers as a result of the EU ETS. The trade association thus urged the EU executive to ensure that the measures do not hinder their activities.

No case for carbon leakage

Green groups, on the other hand, say the number of sectors exempted from carbon trading will be too high under the Commission's assessment. They argued that half of the sectors are deemed to be exposed to carbon leakage, covering as much as 90% of industrial emissions.

WWF criticised the Commission for failing to run a proper scientific exercise and bowing to big business by excluding most of the sectors from carbon obligations due to their trading intensity. The NGO said that in many cases, the data does not reflect reality.

In the case of cement, the second-largest sector in the ETS, WWF pointed out that the percentage of international trade is in fact very small. Instead of looking at the price increase, the Commission should look at the structure of the market. Indeed, regional markets, usually composed of few new entrants, can easily pass the CO2 price on to customers, the NGO argued.

Sanjeev Kumar, WWF's ETS expert, added that benchmarks could potentially exacerbate the situation when determined. He said businesses would certainly be looking to get as flat a benchmark as possible to collect the maximum free allocation.

"Industries are asking for a subsidy for their most carbon intensive part of the sector," Kumar said. He added that there would be a huge competitive distortion unless the greener parts of the sectors are over-subsidised. 

Legal breach

Some observers have also raised suspicions that the Commission's methodology, based on 100% auctioning, is in breach of the revised ETS Directive, as full auctioning only applies to the power sector. Industrial installations will still get 80% of their allocations for free in 2013, being being gradually reduced to 30% by 2020.

Environmental law group Client Earth argued that the list of sectors considered to be exposed to carbon leakage could be later challenged under EU legislation.

Another legal problem with the list lies in the timing. According to the directive, the list of sub-sectors should be determined after taking into account third countries' commitments to greenhouse gas emissions in the relevant sector.

The Commission, however, aims to adopt the list by the end of the year, without considering the outcome of the UN Climate Change Conference in Copenhagen, which will seek to reach agreement on a successor to the Kyoto Protocol in December.

"You should define the sectors only after you have an international treaty, which is what most people supported," Sanjeev Kumar, WWF's ETS expert told EurActiv. He argued that it is bad timing to send a protectionist signal to the US, China and India as the world is facing the challenging task of hammering out a bipartisan deal on reducing greenhouse gas emissions.

Cement industry calls for sectoral approach

In the meantime, the cement industry is united in calling for a sectoral approach to emissions reduction in the post-2012 climate treaty. 

Demand for cement will almost double by 2030 due to new construction in developing countries, but CO2 emissions could be cut down by as much as a quarter from business-as-usual, said Howard Klee, who directs the cement sustainability initiative (CSI) at the World Business Council for Sustainable Development (WBCSD).

The CSI brings together 18 large cement companies, responsible for 40% of global production, which believe that sectoral goals are the most efficient way to cut global emissions and ensure a level playing field.

"We do not think we will have global caps, and the next-best option we see is the sectoral approach," said Patrick Verhagen from Holcim group, referring to the CSI's analysis of cement's emission reduction potential under different policy scenarios.

The advantage of taking on sectoral reduction goals would be to engage the developing world in mitigation actions, while industrialised countries would take on emissions caps. This would create a smaller market distortion, but the cement industry argues that regions with caps would still need to safeguard their industries from carbon leakage. They should, for example, make appropriate allowance allocation choices or put in place measures such as import tariffs, it says.

The sectoral approach would nevertheless provide an incentive to slash emissions by substituting clinker with fly ash, which is a bi-product of steel production. Environmentalists are concerned that the way emissions allowances will be handed over to the big polluting sectors will overshadow all efforts to move to low-carbon alternatives.

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