EU lists industries exempted from carbon trading

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Experts from the 27-member bloc agreed on a list of industries ranging from plastics manufacturing to iron and food processing that will be largely exempted from CO2 trading after 2013 for fears that their inclusion would move production abroad.

National experts agreed on a list of 164 sectors deemed to be at risk of relocating their activities to foreign countries that have not adopted greenhouse gas emission restrictions similar to the EU’s. The threat is dubbed “carbon leakage” because industries and their related polluting emissions would simply move abroad without any benefit for the environment. 

The list, covering the most carbon-intensive industries such as steel, cement and chemicals, represents 77% of the total manufacturing emissions under the EU’s emissions trading scheme (EU ETS). These will continue to get a higher share of their emission allowances (EUAs) for free after the EU ETS has been revamped in 2013, after which date the power sector in the EU-15 will be obliged to pay for all its permits.

The Commission’s calculations are based on two criteria: the intensity of trade with third countries and the increase in production costs as a result of complying with the directive. This approach qualified a range of industries for permit exemptions, ranging from plastics and iron to food processing and weapons manufacturing.

Observers say member states have been pushing heavily to protect industries vital to their national economies, with environmentalists in particular attacking the Commission for tailoring the criteria to suit the interests of national capitals (EURACTIV 26/05/09). 

A decision to postpone a final decision over brick and roof tile manufacturing until member states have submitted more data was seen as further evidence that the Commission’s assessment of vulnerable industries has little to do with genuine threats to competitiveness. These are local industries and are thus unlikely to face competition from outside of Europe, experts said.

The list will apply for five years until 2014, but the EU executive says new sectors could be added in the meantime. It hopes to see it adopted in December, provided that the European Parliament and the 27 governments agree to it over a three-month scrutiny period.

Global deal to even out trade disadvantage

The EU is eyeing an international climate agreement as a way of ensuring that other industrialised countries put in place similar emissions reduction targets, relieving the pressure on its industry.

“The risk of carbon leakage could be lessened by the international climate change agreement due to be concluded at the Copenhagen UN climate conference in December,” the Commission said in a statement. It announced that it would review the list after Copenhagen to see if it was necessary to propose revisions.

But some member states have already taken the stance that the precautionary measures to tackle carbon leakage are too weak. France and Germany have therefore taken the initiative to push for carbon border tariffs that would allow the EU to levy a tax on imports that come from areas without a price on CO2 (EURACTIV 18/09/09).

Moreover, the carbon leakage discussion is far from over, as the actual number of free allowances that each installation gets will not be decided until 2011. These will be determined on the basis of “performance benchmarks”, meaning that only the 10% most efficient installations will receive all their allowances for free.

The Commission hopes that the benchmarks will give manufacturers additional incentives to cut emissions. On the other hand, environmentalists have voiced concerns that the process of setting these will give industries another chance to dilute the environmental impact of the ETS by bargaining for as flat a benchmark as possible, allowing them to collect the maximum free allocation.

French President Nicolas Sarkozy and German Chancellor Angela Merkel sent a letter to the UN secretary-general ahead of his New York climate summit on 22 September, arguing that a new climate agreement must include an option for countries that take on more ambitious climate targets to protect their industries.

"It will not be acceptable that the efforts of the most ambitious countries are compromised by carbon leakage that results from the absence or insufficiency of some. For this reason, it has to be possible to put in place appropriate adjustment measures towards countries that do not respect this treaty or are not parties to it," they wrote.

WWF  pointed out that there are only a few sectors where there is both a price increase and high levels of international competition, indicating that carbon leakage does not necessarily exist. "When you go down and you look at the numbers sector by sector, the ETS is going to have limited impact," said Sanjeev Kumar, an emissions trading expert at the green NGO.

The German Marshall Fund of the United States published a survey on 17 September arguing that the impact of the EU ETS on business competitiveness has been minimal so far, and instead has brought about energy efficiency gains. 

The study found that the ETS has not significantly increased costs for businesses and they have not relocated their operations or reduced their workforces. However, it highlighted fears among energy-intensive companies that if Europe's main competitor countries do not impose similar climate laws on their industries, the post-2013 EU emissions trading scheme could shift European industry to regions without such emission constraints.  

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, revamping 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, argues 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).

  • Sept.-Dec. 2009: Scrutiny by Parliament and Council.
  • Dec. 2009: Commission plans to adopt list.
  • 7-18 Dec.: UN climate conference in Copenhagen.
  • By end of 2010: Performance benchmarks to be determined.
  • 2011: Number of free allowances to sectors vulnerable to carbon leakage to be decided. 

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