EU emissions trading scheme needs urgent reform

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of PLC.

The steel industry is one sector in which further carbon reductions are limited by currently available technologies. [Archangel12/Flickr]

The EU emissions trading scheme (ETS) puts thousands of jobs at serious risk in the steel, chemical, fertiliser and refining sectors, writes Marcin Bodio.

Marcin Bodio is the chief executive of Central Europe Energy Partners (CEEP), which represents both the energy and energy-intensive sectors from Central Europe in international forums.

The Paris agreement has shown that the EU’s proposal to decrease CO2 emissions by 40% by 2030, from 1990 levels, was the most ambitious pledge at the summit. Other industrialised countries, such as the US and Australia, as well as emerging powers, notably China and India, are lagging behind Europe.

If we translate the pledges into emissions per tonne per capita, then in 2030, we can expect below five tonnes in the EU and nearly 12 tonnes in the US. However noble the motives behind these pledges, they are not without their costs, especially in “lower-income member states”. According to Eurostat, the economic distance between the EU-15 and EU-11 has hardly changed in the last ten years.

This is a real European problem that requires immediate attention, as new investments are desperately needed in the EU-11. In energy-intensive industries, these investments are hardly possible under the current climate policies. The upcoming implementation of the market stability reserve (MSR) mechanism will only make this problem bigger.

The question is: do we really need the prices of CO2 allowances to go up under the MSR regime? The goal to decrease CO2 emissions in the EU by 20%, by 2020 was already achieved in 2013 and today the level of reduction is close to 25%. By 2020, it should exceed 26%, which is almost one third more than originally expected.

So, does this splendid result prove the effectiveness of the ETS system? On the contrary: a closer analysis of the data shows that it is the implementation of new technologies and innovations, including RES development and growing energy efficiency, which serves as the driving force behind these reductions.

Our calculations indicate that high CO2 prices, driven by market intervention under the ETS system, are not necessary for the achievement of the EU’s emissions reduction targets for 2030. Neither back-loading and MSR, nor the planned linear reduction factor of 2.2% per year, can truly serve the EU’s climate goals. Their only tangible impact will be a further decrease in the competitiveness of the European economy and an exodus of industries from the EU.

This refers to such strategic sectors, as steel, chemical, fertiliser and refining. Due to the currently available technologies, these industries have limited chances for further CO2 reduction. That is why a level playing field is urgently needed with their global competitors, in order to safeguard their long-term operating perspective in Europe.

At the moment, this can only be done with a robust carbon leakage protection against direct and indirect carbon costs. In this sense, the revision of the ETS Directive must provide the legal certainty that sectors at high risk of carbon leakage receive a truly 100% free allocation.

Moreover, improvements in current National Investments Plans should better address the diversification purposes, such as the inclusion of RES investments in the plan. At the same time, the climate neutrality indicator, aiming at a greener Europe, should be introduced into GHG emissions calculations after 2020.

It is also clear that the development of new technologies and innovations demands funding support in those member states, where GDP per capita is below 60% of the EU average. The Modernisation Fund framework should respect the leading role of the beneficiary member states, with the co-ordination provided by the European Commission and an advisory role for the European Investment Bank.

Let us not forget that each member state should be allowed to shape its energy-mix and be regarded as eligible for financial support. These proposals regarding the ETS reforms, presented by Central Europe Energy Partners (CEEP) to the Commission, fully endorse an ambitious climate policy in the bloc. Yet, they also aim at making this policy economically realistic.

A lack of such realism will result in the relocation of domestic capacities and jobs outside the EU. This will also be detrimental to the global environment, as EU industry is, on average, considerably more effective in controlling emissions than the rest of the world.