Setting aside the case for ETS set-asides

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A proposal to set aside carbon credits in the EU's Emissions Trading Scheme (EU-ETS) to prop up the price of CO2 is bad for the credibility of the ETS and bad for European competitiveness – especially the chemicals industry, writes William Garcia from CEFIC.

William Garcia is Executive Director for energy, HSE and logistics at CEFIC, the European Chemical Industry Council. He sent this commentary in exclusivity for EURACTIV.

"The European Parliament voted March 15 in favour of a resolution for the Roadmap for moving to a low carbon economy and for a proposal that the European Commission should consider to 'set aside' CO2 allowances under the Emissions Trading Scheme (ETS).

Designed to take CO2 emissions allowances out of the auction phase, the proposed set-asides would seriously harm the competitiveness of European industries like chemicals and undermine the trust level of all participants in the ETS market.

If set-asides were to surface, it would create unwanted uncertainty. Firms participating in the ETS would be forced to change already-agreed rules of the game. They would not know how many allowances would be set aside, or what effect this might have on the price of the remainder, as we can only loosely estimate the effect. Changing the rules creates long-term damage too, as it sets a dangerous precedent that other countries – making up the vast majority of global emissions – will look upon with trepidation before considering their own ETS-type systems. 

As the chemicals sector begins participating in Phase 3 of the scheme next January, we fear that set-asides would hit the bottom line of compliance buyers like chemicals firms in two ways. First, company direct costs would rise as prices increase for carbon emissions certificates. Second, indirect costs could hit us harder, as electricity prices charged by utilities could go up as they pass through added costs they incur when buying emissions certificates. Chemicals producers, despite already lowering energy use per unit of production by 54% since 1990, would face untimely added costs as energy use can make up to 60% of their operating costs.

The effects are clear. Most notably, firms’ appetite to book one-way tickets would grow as they set up shop in other markets – carbon leakage. One recent study published by the Nordic Council of Ministers, titled Carbon leakage from a Nordic perspective, confirms this.

The ETS is working

Although not perfect, the ETS is working. The scheme is on course to meet the EU target of 20 per cent greenhouse gas reduction by 2020 while achieving a far lower cost to society than originally projected. Critics say set-asides are needed to offset an ETS price level that they consider too low, halting new investment in EU renewables capacity. But data show that 2011 was a record year for investments. Those investments have put downward pressure on the price, which has fallen faster than originally anticipated and will likely further reduce demand.

Commercial self-interest dictates that companies lower CO2 emissions. The chemicals industry is no exception. The sector reduced its total greenhouse gas (GHG) emissions by 49% between 1990 and 2009 while production rose by 60%.

Innovation is the way forward

Whatever policy solution plays out, innovation will have a role in this debate. Cost effective, low-emission technology only comes through breakthrough technologies from sectors like chemicals. That could lead to less dependence on high-CO2 coal – a game changer.

We must move debate away from set-asides and move towards innovation. If we don’t, then expect companies to see higher electricity bills and find strong incentive to relocate. But don’t expect to see ETS gaining ground as a policy solution from policymakers abroad."

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