Petroleum refiners have teamed up with other energy-intensive industries to warn about EU plans to hike the cost of emitting carbon dioxide, echoing previous warnings about “carbon leakage” which critics say have failed to materialise.
EU lawmakers are meeting behind closed doors on 12 October for another go at hammering out a compromise on post-2020 reforms to the EU emissions trading system (ETS), Europe’s flagship instrument to curb climate change.
Petroleum refiners are fighting alongside other industrial sectors that generate huge amounts of greenhouse gases to reduce their exposure to the expected rise in the cost of polluting.
Refiners – along with companies in the cement, glass, paper, chemicals and metals industries – have so far received the bulk of their allowances for free. Legislators granted those benefits based on the logic that forcing them to pay in full would render them globally uncompetitive and liable to abandon the EU.
The present reforms will not change this fundamentally. Energy-intensive industries will continue to receive free carbon emissions allowances, as compensation for the EU’s stricter climate rules, although those will be fewer.
Nevertheless, the way reform negotiations are heading is giving energy-intensive industries the jitters.
Price projections in the carbon market are notoriously variable, but most point towards a significant increase heading into the next decade. A July study commissioned by the lobby group BusinessEurope forecast that the cost of emitting one tonne of CO2 could increase to between €33-€36 by 2030 under the reform proposals currently on the table.
The price of an emission allowance is currently hovering around €5 a tonne, way below the €30 or so that are considered necessary to encourage investment into low-carbon technologies.
The hundred or so refineries in Europe emitted close to 140 million tonnes of CO2 last year, and received 100 million free allowances, according to data cited by the trade association Fuels Europe. Operators clearly feel the stakes are high ahead of the October “trilogue” talks between lawmakers from the European Parliament and the EU Council’s national government delegates.
As a member of the “Alliance for a fair ETS” – which comprises 16 other lobby groups representing the cement, glass, paper, chemicals and metals sectors – the petroleum refiners trade association Fuels Europe has issued a series of recommendations to lawmakers.
They call for the total number of allowances available for free allocation to be increased from the 43% proposed by the European Commission to as much as 48%.
MEPs and governments have already agreed to double the rate at which a carbon market stability reserve (MSR) absorbs surplus permits to 24% a year. The MSR was designed to table a glut of emissions permits forecast to hit 2.5 billlion by the end of the decade and is due to start operating in 2019.
This will have “an early, direct impact” on the price of allowances, the alliance wrote.
The heavy emitters are calling for a “safety valve” to be built into the ETS, with unused allowances from the current period (2014-2020) and those absorbed by the MSR, which would otherwise be cancelled, being recycled “to the amount needed in the event of a free allocation shortage”.
In addition, an innovation fund for low-carbon technology should be funded only from allowances designated for auction, they say.
Their argument, and the logic behind the free allocation of allowances so far, is the fear of a loss of competitiveness vis-à-vis competitors from outside Europe that do not have to pay as much for the pollution they generate.
The term “carbon leakage” is used for the scenario of companies leaving Europe for less regulated regions, taking their CO2 emissions with them – although some have argued there is little evidence of the phenomenon to date.
The European Commission noted in a “sectoral fitness check” conducted in 2015 that refiners actually received more free allowances than they needed in the first two phases of the ETS, from its inception in 2005 to 2012, although allocation rules were then tightened for phase three.
The real concern, according to Fuels Europe spokesman Alain Mathuren, is for the future, with the overall supply of both auctioned and free allowances (the cap) being tightened in phase four (2021-2030) at a proposed rate of 2.2% a year and the MSR expected to trigger a significant price increase.
“The combination of these two factors would have as a consequence that even the best performers (benchmark refineries) would have to bear an ETS cost. This could trigger the risk of relocation of activities, which once started will be difficult to stop,” Mathuren said.
Not everyone is subject to the EU ETS, which, with a current cap of 1.93 billion, covers roughly half of the EU’s total greenhouse gas emissions. Electricity generators are, but as they cannot move their power stations out of Europe to escape the ‘polluter pays’ principle, they receive no carbon leakage protection.
But how real a prospect is it that oil companies would consider it financially worthwhile to shut down European refineries and build them elsewhere?
“The EU refineries operate in general in a very open, liquid, tradable market,” says Mathuren. Closing refineries and opening new facilities (or increasing the capacity of existing ones) outside Europe, then importing the products could make economic sense.
“The damage to the supply chain, to employment, to the loss of know-how, to the fiscal revenues and to the EU economy in general would be then be unavoidable,” he added.