Carbon market reform vote puts EU cement sector in the spotlight

The Berlin-Rummelsburg cement factory. [wiseguy71 / Flickr]

Green lawmakers in the European Parliament have raised the stakes in the proposed overhaul of the EU carbon market, saying they would reject any deal that leaves the cement sector off the hook when the reform comes to a vote next week.

A tentative deal on the proposed reform of the EU carbon market, struck last December in the European Parliament’s environment committee, is being put to a vote next Wednesday (15 February) when lawmakers meet for their monthly plenary sitting in Strasbourg.

And the Greens know like no others how to raise the stakes when it comes to climate policies.

“A cornerstone of the compromise reached between the different political groups is the removal of cement and clinker from receiving free allocations” as of 2021, the Greens said in a briefing note circulated ahead of the vote.

Heavy industries like chemicals, steel and cement are offered a certain amount of free pollution credits under the ETS. This is intended to help investments in low-carbon technologies by allowing them to sell the surplus on the EU carbon market.

Bas Eickhout, a Green MEP from the Netherlands, said the cement sector is due to receive around 1 billion free allowances in the next phase of the ETS, which starts in 2021. At the current rate of €5 per tonne of CO2, this would translate into €5bn in windfall profits for the cement industry, a figure that could easily climb to €20bn if the price of carbon picks up as expected after the reform is adopted, Eickhout said.

Taking those allowances out of the market would further boost the price of carbon and increase chances of meeting the UN objective of containing global warming within 2°C, the Greens argue.

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Carbon tariff

The ETS has attracted criticism from power-intensive industries including cement, metals and heavy chemicals for driving electricity prices up. Industrialists argue that the scheme is putting EU companies at a disadvantage compared with global competitors, who do not have equivalent constraints.

To compensate for the loss of free permits, the tentative Parliament deal foresees the establishment of an adjustment mechanism at the border – a kind of carbon tariff – aimed at protecting Europe’s cement sector from cheaper imports coming from abroad.

Eickhout insisted that the two parts of the deal were indivisible and should be tied together.

“If the Commission doesn’t deliver on the border adjustment mechanism by 2019,” then the cement industry “will remain on the free allowance list”, Eickhout stressed. “So when you hear the cement sector crying wolf, they are in fact pretty well protected,” he claimed.

Cement industry representatives in Brussels certainly don’t think so.

“We have been particularly vocal on the suggestion to introduce an importer inclusion mechanism with loss of free allowances,” said Koen Coppenholle, secretary general of Cembureau, the industry trade body in Brussels.

“We strongly oppose such a move which entails legal uncertainty and is discriminatory also on downstream and export markets,” he told in e-mailed comments.

According to Coppenholle, the discussion in Parliament has “lost its focus” by concentrating on which industrial sectors should receive free allocations. Rather, he believes MEPs should concentrate on incentives to reduce emissions and reward the best performing operators, in line with what EU leaders decided in October 2014.

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Energy-intensive alliance stands united, for now

“Let us be clear, we oppose any suggestion whereby a differentiated treatment is introduced for a sector,” Coppenholle said. “And we are supported by most of our friends in energy-intensive sectors,” he added.

In fact, the tentative Parliament deal on cement is seen by some as an attempt to divide the Alliance of Energy Intensive Industries, which groups together highly polluting sectors such as steel, chemicals, petroleum, paper, container glass and cement.

Cement stands out from others in the alliance because very little of it is imported from outside of Europe, contrary to the chemicals or steel sectors, which are more exposed to international competition.

“The construction sector has a very domestic nature. It is simply too heavy and costly to transport far,” the Greens argue in their briefing note, saying there is “no risk” of domestic production being moved abroad in response to rising production costs caused by the loss of free CO2 allowances.

But the Greens argue this is not the case for other industries, which should continue to receive free allocations after 2021. “There are a couple of sectors where there is no debate – steel, chemicals – there is a lot of international trade on these,” Eickhout said.

Besides, the cement sector has been using the free allowances to boost its exports, Eickhout claimed, saying this partly explained why cement was listed as a “trade intensive” sector under the ETS. “What we see is that the exports increased over the past years when they started getting the free allowances,” he said.

Carbon market omission: The cement industry

The cement industry has huge potential for emission reductions and innovation, but the current EU carbon market rules don’t reward industry frontrunners. On the contrary, the over-generous allocation of free pollution permits favors big incumbents.

The Greens’ attempt at wooing the chemical and steel sectors has so far failed to divide the Alliance of Energy Intensive Industries, which is keeping a united front – at least for the time being.

William Garcia, executive director in charge of energy and climate at the European Chemical Industry Council (CEFIC), said the proposed border adjustment tax would be “disastrous” for European industry as a whole.

“Although it’s tailored to exempt one particular sector from the ETS, it’s just the start and could wipe out the entire ETS in the near future if applied to other sectors,” Garcia told EURACTIV.

“Also, it will be very difficult to implement in practice for diverse products like chemicals that are traded globally. It can be challenged under the World Trade Organisation (WTO) on several grounds, and risks triggering economic retaliation from Europe’s trading partners,” Garcia said.

In any case, such a far-reaching proposal should not be put on the table without a proper impact assessment on its feasibility, costs or intended benefits, he argued.

However, it seems cracks may be starting to appear in the industry’s united front.

“I will not name sectors but some argue they can not reduce emissions and therefore need more free allowances,” Coppenholle said. “If, in the legislator’s wisdom, a cross-sectoral correction factor were to be introduced, it should of course apply equally to all sectors,” he said.

Commission rejects carbon tariff idea

Ian Duncan, a Scottish Conservative MEP who is leading the negotiation on behalf of the European Parliament, confirmed that the cement deal was fast emerging as a flashpoint in the ETS reform talks.

In case the tentative deal collapses, negotiators will fall back on the Commission proposal and continue from there, he said yesterday (9 February).

The European Commission, for its part, appears highly sceptical about border adjustment mechanisms, which have been pushed by countries like France in the past.

“With the positive outcome of the Paris Agreement, the Commission sees no need to keep border measures in the EU ETS toolbox post-2020. It would send a negative signal to the international community. Border measures are also extremely challenging to implement and to secure compliance with WTO rules,” a Commission source told EURACTIV.

“Free allocation has proved to be effective, and we should continue with this approach,” the Commission source said. “Border measures cannot be added to free allocation and their use would therefore imply a phase-out of free allocation,” it added, apparently siding with the arguments of the energy-intensive alliance.

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