Oil refiners ask for shelter from CO2 trading perils

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Europe’s fuel refining sector may be succeeding in its attempt to receive free emissions credits under the next phase of the EU’s CO2 trading scheme, EURACTIV learned in an interview with Isabelle Muller, secretary general of Europia, the oil refining industry association.

Muller, a former executive at French oil group Total who was appointed to her position at Europia in June last year, believes she has made her case to the European Commission regarding the refining sector’s exposure to international trade and the risk of de-investment in Europe linked to CO2 emissions restrictions.

“We are now considered as the manufacturing sector, an energy-intensive sector, and possibly subject to carbon leakage,” Muller said in an interview with EURACTIV. “This was a move from the Commission that was much appreciated,” she added, saying refiners will no longer be required to buy 100% of their emission credits at auction under the next phase of the EU Emissions Trading Scheme (ETS), which starts in 2013.

Only the electricity sector will be required to buy all of its emissions rights at auction under current EU plans, a move which is expected to cause a steep rise in CO2 cots for the power sector after 2013.

Debate has been raging in Brussels and European capitals about the potential negative effects of the scheme for heavy industries, such as steel, cement and chemicals. Germany and France in particular have been pushing for an early definition of sectors exposed to ‘carbon leakage’, whereby industries relocate to parts of the world where CO2 emissions are not regulated.

“Given that our industry is exposed to global competition and subject to carbon leakage, we aim to demonstrate that we should be eligible for as many free allocations as possible,” Muller said.

And she is confident that the message has now been heard. “Our understanding is that at the highest level in the Council, some countries have understood the issue. Even at the highest level of the Commission, President Barroso has also understood the issue. And we have repeated confirmation from legislators that the intent is in no way to kill the industry and that the objective is definitely to balance competitiveness, climate change and security of supply.”

Free allocations but no free ride

However, Muller insists that the move towards free allocation permits would not bring an end to refiners’ CO2 reduction obligations. “Today, we already have a cap that has been set by the ETS and our emissions have to be reduced over time,” Muller says, referring to the EU target of reducing emissions by a fifth by 2020. “When we say free allocations, we mean allocations under the cap. But what is over the cap, we have to pay for, whatever happens.”

Muller also underlines that refiners are under pressure to produce more diesel fuel, which is currently mainly imported from Russia due to a lack of refining capacity in Europe.

But because diesel production is more energy-intensive, she says European demand can only be met with increased CO2 emissions.

“Essentially, we are making the products that the market wants but in order to do so, we have to increase our emissions,” Muller says. Together with new environmental regulations to reduce the sulphur content of fuels, she says meeting European demand for diesel could lead to a 50% increase in CO2 emissions compared with the current situation.

“It is very simple: we have a 100% CO2 emissions today. From that, we have to go up to 150 while decreasing emissions 20% from the initial 100. We consider that’s already a considerable contribution.”

CO2 border tax no longer taboo

Muller also says the idea of imposing some form of tax on goods imported from countries where CO2 emissions are not regulated is making inroads among policymakers and the wider business community. “I would say that this option is no longer directly rejected,” says Muller.

She refuses the notion that such a “carbon inclusion mechanism” could be associated to a border adjustment tax. The idea, originally championed by France, was rejected by supporters of free market policies on the grounds that it would trigger a trade war (EURACTIV 16/09/08).

“Some may probably argue in this way,” Muller concedes. But she warns that the United States have already been discussing trading schemes for CO2 “that explicitly include such a “carbon inclusion mechanism'” and that the issue will come back after the presidential elections in November.

“This means that, if we do not put this in the legislation today, we run the risk that, two years from now, the US will have such a system in place and we may essentially have to pay for the CO2 twice.”

To read the interview in full, please click here.

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