EXCLUSIVE/ EU climate legislation robs paper recyclers of at least 40% of their profits, the equivalent of at least one billion euros of lost potential investment in the green economy, a European paper industry chief has said.
Sylvain Lhôte, the new director-general of the Confederation of European Paper Industries (CEPI), said red tape from EU climate and energy policy had placed a huge burden on his sector from 2005 on, in addition to tax and business rates.
“40% of profitability is swallowed by unintended regulatory costs,” he said. “How much have we lost? If you take out 40% of the profitability of the sector, you take out 40% of its financing capacities,” he told EURACTIV.com.
“If financial capacities had been better restored and protected over the past ten years, we would have a level of investment pretty close to what it was before the [financial] crisis. So, a billion euros or higher.”
EU environment ministers meet today (28 February) in Brussels. They are expected to reach an agreement on the reforms to the bloc’s carbon market post-2020. The revised Emissions Trading System (ETS) will only enter into force when an identical bill is agreed between the Council and the European Parliament.
The ETS, a cap-and-trade permit system to regulate industry pollution, has suffered from excess supply since the financial crisis, depressing its prices and heightening the need for reform. It is a major part of the EU’s push to meet its UN climate change commitment to cap global warming.
Unless the draft reforms are strengthened, the carbon market will remain oversupplied until 2030, according to the Climate Action Network, a NGO.
Lhôte said that the ETS penalises paper recyclers, even though the paper industry’s sustainability record is among the very best. The European Union is pushing to boost recycling levels through its Circular Economy package of waste laws.
The package of six bills is designed to put the EU towards a future where as little as possible is wasted in a world of finite resources.
Ironically, this green vision, which requires the creation of new recycling technologies and markets, was being hampered by EU laws designed to cut global warming emissions, Lhôte said.
“Climate change legislation, energy legislation. All those legislations are well-intentioned,” Lhôte said, “[But] their implementation for the past ten years has led to a tripling of the cost to our industry.”
“It’s administrative costs, it’s capital expenditures, it’s 6% of the added value for a commodities industry with a limited margin, it’s massive.”
Despite the burden, Lhôte said paper had a 70% effective recycling rate in Europe, and he insisted that no paper recyclers had gone out of business because of the red tape.
But even the Renewable Energy Directive, which seeks to boost the shares of clean energy in the EU, had brought hidden costs to recyclers, according to Lhôte.
EU policymakers failed to understand that the integration of renewables would require huge investment into grids. Fees and tariffs levied by member states to meet those costs were passed onto paper recyclers and other industries, he said.
Low carbon price
The ETS is the world’s largest carbon market. Regulated businesses measure and report their carbon emissions, handing in one allowance for each tonne they release. Permits can be traded on the markets as an incentive for companies to reduce emissions.
On 15 February, the price was only about €5 a tonne of carbon emissions, which is too low to incentivise industries to invest in green innovation, renewable energy and energy efficiency.
Climate Action Network argues that the carbon price needs to be raised to at least €40 per tonne to interest investors in low carbon technologies.
In Germany and France, a €1 increase on the carbon price hikes an energy bill by 76 cents, Lhôte claimed.
“The best kept taboo at European level is the carbon price is transferred into the power bill that industry pays every day,” he said.
“And that’s the killer at the end of the day because if you want to manage the transition towards a low-carbon economy you need to give a chance for the industry to economically strive and invest.”
Paper recycling is energy intensive. According to Lhôte, the ETS increases the energy costs that the recycling operations must pay to retransform paper into good quality pulp in order to then retransform the pulp into paper.
Such indirect costs are paid by energy intensive industries through their energy bills. Suppliers pass on the costs to their customers but, under the ETS some energy intensive industries are granted free carbon allowances to offset that cost.
The free carbon allowances are designed to prevent the risk of “carbon leakage”, where industries move outside of the EU to escape more stringent climate legislation.
Earlier this month, the European Parliament backed post-2020 reforms to the ETS. To minimise the risk of industry moving abroad to escape climate regulation, the draft allows for the share of allowances auctioned to be reduced by up to 5% to cushion against the impact of a cap on overall allocations, known as the cross-sectoral correction factor.
Agnes Brandt, senior EU policy officer at Carbon Market Watch said the paper recyclers were already catered for in the reforms.
She said, “Energy intensive industries are given special treatment by getting free allowances. They are receiving free allowances to help them be competitive.”
But Lhôte said the reforms would cut those allocations, leading to a gradual increase in recycler’s costs.
“We need clarity, we need sanity. We need to turn ETS into a pro-investment tool,” he said, “it’s extremely difficult for our industry to properly project over the next decade.”
Lhôte conceded that the European Commission’s reforms were an improvement on the status quo and he said much responsibility for the future of paper recycling lay with member states. Nations make money from carbon allowances auctions.
“Who’s gonna spend the money, the billions of euros the ETS is going to generate? The member states,” he said.
“Who will make the strategic choice to support manufacturing industry investments or to add another layer of subsidies? The member states.”
CEPI yesterday published a plan to cut the paper industry’s carbon emissions by 80% while creating 50% more value by 2050. The association’s strategy estimates that €44 billion more investment – a 40% increase on current levels – is needed to transform the industry in Europe.
The EU's Emissions Trading System is the world’s biggest scheme for trading emissions allowances. Regulated businesses measure and report their carbon emissions, handing in one allowance for each tonne they release. Companies can trade allowances as an incentive for them to reduce their emissions. Countries can also sell permits to the market.
The European Commission has proposed a series of reforms to the ETS.
Pollution credits were grossly over allocated by several countries during the 2005 initial implementation phase of the ETS, forcing down carbon prices and undermining the scheme's credibility, which prompted the EU to toughen up the system. Carbon prices have since remained stubbornly low at under €8 a tonne.
The proposed reform proposes tightening the screw on heavy polluters by restricting the amount of pollution credits available in the period 2021-2030.
Under the Commission proposal, 57% of allocations will be auctioned by member states, the same as in the current trading period (2013-2020). They are estimated to be worth €225 billion. 43% (6.3 billion allowances) will go to industry in free allocations, worth an estimated €160 billion. Those will be divided out, with the most efficient companies being prioritised. So the best performing companies will still get the benefit of free allowances.
177 sectors currently qualify for free permits. About 100 will drop off the list for 2021-2030. They are likely to be those that qualified because of their trade intensity rather than their emissions intensity.
The list will stay the same for ten years, rather than the five years of the previous trading period. This will make it more stable and give greater investor certainty. The new system will take into account production increases and decreases more effectively, and adjust the amount of free allowances accordingly. A number will be set aside for new and growing installations.