Heavy industries renew calls for ‘carbon leakage’ protection

Factory pollution. US, 2007. [Eric Schmutternmaer/Flickr]

Raising the EU’s emission targets for 2030 would threaten industrial competitiveness if they are not accompanied by supporting measures, according to the chemical industry and other energy-intensive sectors, which stepped up their campaign for protective measures in Brussels on Tuesday (9 September).

Existing measures to support industrial sectors at risk of relocating abroad due to the EU’s energy and climate policies, should be revamped to focus “on sectors really affected by leakage risk”, according to the European Chemical Industry Council (CEFIC).

‘Carbon leakage’ happens when companies reconsider their European investments or relocate their factories outside of Europe, where the cost of compliance with environmental legislation is lower.

European industry groups have often invoked the carbon leakage threat, although there is little evidence proving the scale of the problem.

>> Read: EU ‘carbon leakage’ list is outdated, says report

Existing provisions to protect industrial sectors at risk of leakage are set to be maintained, at least until 2030, according to draft conclusions of a forthcoming EU ministerial meeting, seen by EURACTIV. The provisions are contained in the EU’s emissions trading scheme (ETS) for carbon dioxide, which places CO2 emission limits on heavy industries.

The European Commission has held meetings with key industry groups this summer to thrash out whether the free allocation of carbon permits to big polluters should continue after 2020, when current measures expire.

The document, seen by EURACTIV, may date back to July, and it is possible that the proposed options have been tweaked since then. The proposal is part of the 2030 climate package that European heads of state will have to approve in October.

How does the system work?

Speaking to EurAciv, steel industry association Eurofer warned that the “global competitiveness of our industry will be negatively impacted if free allocation of carbon credits is reduced”.

Currently, industry facilities at risk of leakage receive a certain amount of free carbon credits, which helps them cover the extra cost of compliance with the ETS system and retain their global competitiveness.

In order to determine the amount of free credits to be granted, the EU looks at past production levels, as well as emissions performance of the various installations, among other things.

Factories ranking among the 10% best on emissions performance are used as a benchmark, and receive 100% free allocations to reward their environmental performance. By contrast, factories with a lesser performance receive a smaller amount of credits and may have to buy some on the market.

In a letter sent to the EU heads of state, the European Alliance of Energy-intensive industries – which includes Eurofer and chemicals trade body CEFIC – urges EU authorities to change the system, which they claim does not meet its intended goals. They claim the situation would worsen considerably if a 40% greenhouse (GHG) gas reduction target is approved for 2030.

A more flexible system

At this time, 90% of Europe’s 12,000 energy intensive industrial installations are unable to meet current EU GHG emission benchmarks, let alone the tighter 2030 targets, the Alliance claims. If the benchmark (of the best 10%) is maintained, the system of free carbon credits is likely to be insufficient.

Currently, some industry groups choose to stop or cut production growth, so that they don’t have to buy extra credits, which is bad for the economy. Others, still, choose to grow elsewhere, where they do not fall under the scope of EU ETS. Investment relocation is also bad for EU jobs.

At the same time, the price of carbon – currently hovering at around €5 a ton – is currently too low to move investment decisions, creating a massive surplus on the market which sent prices crashing. EU measures to support the price of carbon includes backloading and the market stability reserve which both aim to shrink the carbon market glut.

Taken together, all these measures, in addition to the uncertainty of EU climate commitments to be agreed at the 2015 United Nations Climate Change, may increase the threat of leakage faced by industry, the Alliance claimed.

“While we support ETS reform and EU climate efforts, it is important that the maintenance of carbon leakage provisions to 2030 be coupled with reform of some aspects of that system. For example, emission performance benchmarks must be realistic.

“Also, the system must become more dynamic. The granting of carbon credits should evolve in synch with installations’ production trends instead of being based on old production data. For example, if output at a specific installation is growing, additional free carbon credits should be granted,” the Alliance claims.

“We understand that Council conclusions do not tend to go into as much detail, but they do give an orientation to future Commission initiatives and thus, they should take these issues into account,” urges the Alliance.

Innovation funding

A separate and more consensual initiative emerged from the leaked Council conclusions—the promise to create a “New Innovation Facility” that would initially be funded by a possible 5% of ETS allowances.

Unlike the NER 300 program, which it is destined to replace, the new facility will finance low carbon innovation in the power sector but also in the broader industrial sector.

Speaking to EURACTIV, the European Cement Association (Cembureau) welcomed the concept. “Such an initiative is all the more welcome that in our industry, breakthrough technologies, if successful, will be the only means to drastically cut emissions,” it said. “These are capital intensive projects that imply high financial losses if results do not meet expectations.”

“But for this program to function best, the EU should also solve problems that plagued NER 300 and hampered access to funding,” tempered the Cembureau.

Indeed, “conditions and criteria were overly complex and lacked transparency. Given the high costs involved, funding should account for both capital and operational cost of projects and there should in addition be a ring fenced fund for the manufacturing industry.”

Separately, Eurofer also cheered the creation of such a facility, especially for “large-scale demonstration projects costing several €100 million. The risk that the projects may not be successful is currently preventing investments in the sector”.

But while sharing its colleagues’ enthusiasm, a source at the CEFIC expressed some doubts about the use of ETS revenues as a source of funding: “The main purpose of the ETS is not to generate revenues,” they said. “But if you have them they need to be recycled. The goals of the ETS should first and foremost to achieve agreed emissions reductions at the lowest cost.”

Going ahead, energy and environment ministers are scheduled to discuss the climate package’s various options on 5-6 October. A final decision is expected by heads of states on 23 October.

The European Commission's Communication on Energy efficiency for the '2030 Framework for climate and energy policy' assesses whether the EU is on track to reach its 2020 target to increase energy efficiency by 20%.

It outlines what is necessary to ensure that the target is achieved and proposes a new energy saving target of 30% by 2030.

It completes the 2030 Framework on Climate and Energy which was adopted by the European Commission on 22 January 2014.

The EU currently has three 2020 climate plans – for 20% improvements on the continent’s CO2 emissions, renewables and energy consumption performances. The 2030 targets are the successors of these '20-20-20 goals'.

  • Oct. 2014: Member states decide on the energy efficiency targets in the EU Council
  • Sept. 2014: UN Secretary-General Ban Ki-Moon hosts climate summit in New York
  • Oct. 2014: European Council expected to agree 2030 climate and energy targets
  • Dec. 2014: UNFCCC Climate Summit in Lima, Peru
  • Dec. 2015: UNFCCC Climate Summit in Paris expected to agree outline of global legally-binding climate treaty
  • 2017: Next review of the measures on energy efficiency planned by the Commission
  • 2020: Deadline for EU to meet target of 20% greenhouse gas reduction as measured against 1990 levels, a 20% share for renewable energy in the bloc's energy mix, and a non-binding goal of a 20% energy efficiency improvement, measured against 2005 levels
  • Commission communication of January 2014
  • European Alliance of Energy-intensive industries’ letter to heads of states and EU institutions

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