MEPs must pick between progressive and regressive wings of the cement sector in Wednesday’s vote on the Emissions Trading Scheme, writes James Nix.
James Nix is former director of Green Budget Europe, an organisation working to shift taxation away from labour to pollution and non-renewables.
The background to Wednesday’s (15 February) vote on the reform of Europe’s Emissions Trading Scheme (ETS) is stark. Fourteen months have passed since the signing of the Paris Agreement, with significant setbacks in the US since then. If MEPs reject a reform of Europe’s flagship climate initiative, it will deal another blow to the Paris Agreement.
The vote on Wednesday is essentially to bring the ETS more into line with the commitments the EU made in Paris. The ETS applies to large-scale industrial process such as electricity generation and cement-making, and covers about 40% of all emissions across the EU.
The aim of putting a price on emissions is to boost investment in low-emission production. Instead of continuing with business as usual, companies embrace energy saving technology, source renewable energy, and leave fossil fuels behind. That’s the theory.
The reality of the ETS has sadly been different. As production contracted during the recession, companies realised they had far more emission allowances than they needed. Weighed down by massive oversupply, the ETS price crashed and continues to languish around €5 per tonne.
To spur investment in energy saving and renewables, the price needs to be more than €20 per tonne, and above €35 – €40 to deliver a more substantial shift. In internally appraising its own projects, Shell assumes it will cost €37 ($40) to emit a tonne of carbon in the future.
The ETS price is currently ineffective. On top of that, there is – as yet – little faith European lawmakers will fix the problem. For example, respected analysts Thomson Reuters estimate that the ETS price will average no more than €14 between 2017 and 2030.
The ETS proposal MEPs will vote on this Wednesday is a compromise agreed late last year by the environment sub-committee of the European Parliament (ENVI committee). Made up of MEPs from across the parties, its proposals are essentially based on the level of competition faced by European industries covered by the ETS.
The cement sector faces a far lower level of competition from imports compared to industries such as chemicals and steel. Expressed as a percentage of total EU production, cement imports amount to less than 1.3%, according to 2014 data. “Cement is a relatively shielded sector that has limited competition from non-EU countries”, according to consultants CE Delft in a report for the EU Commission.
As modest as the threat from imports is, the ENVI committee proposes to counter-act it. From 2021 imported cement would pay a Border Adjustment Measure – a charge or tax – that makes non-EU producers pay for carbon emissions at the same rate as their EU counterparts.
For ENVI MEPs proposing a border adjustment measure on imported cement alongside the more publicised ending of free allowances for the sector are two sides of the one coin.
Across industry as a whole, ENVI’s proposals have won many over. In a letter to MEPs ahead of the vote, Eurelectric, the main body representing electricity producers, backed the proposals saying its members are “committed to delivering a carbon neutral power supply in Europe by 2050”, and that “a strong EU ETS should deliver a carbon price signal … to invest in an efficient and sustainable manner”. Turning to chemicals and steel, lobbying against the proposal has diminished, or shifted to seeking more discrete changes.
The cement sector, on the other hand, is split. Progressive producers are in favour, while owners of higher-emission plant call for an outright rejection of the package. Looking at the evidence base, the case made by progressive cement-makers appears stronger.
Formerly with cement-maker Lafarge Holcim, an industry giant, Bruno Vanderborght acts as a consultant to the sector. Writing in Carbon Pulse, he says that delays in reforming the ETS mean that “the EU has the highest share of clinker production in old, energy-intensive installations worldwide, behind only to the former Soviet Union and the US”. While recent years have seen large profits, “none of the proceeds have been used to lower CO2 emissions”. Instead the European cement industry has been using “inefficient installations to increase export of clinker – subsidised by excess free allowances – to Africa, a region with more modern installations”.
A report for the ENVI committee recorded a similar conclusion: the current ETS “creates an incentive to maintain artificially high levels of [cement] production compared to the actual economic situation”.
Put simply, certain European cement producers have been ramping up high-emissions output, dumping production in Africa and elsewhere, and profiting accordingly. Climate emissions from cement produced in the EU increased 32% in the five years to 2014 based on gross added value.
Cembureau represents cement-makers lobbying against the reform package. It now appears to be against a border adjustment measure for imported cement despite having campaigned for many years in favour of its introduction. For cement operators obtaining high margins using inefficient plant that should have been retired years – if not decades – ago, life is too good.
More progressive producers such as Lafarge Holcim don’t want this business model to continue after 2020. They agree real carbon pricing needs to be implemented and want the incentive to innovate now.
So the real question for MEPs this Wednesday is which part of the cement sector to support. The forward-looking operators confident that EU production will thrive under ENVI’s proposals, or the side that wants to continue pocketing plum profits by extending past failures of the ETS out into the future?