Despite the current slump in carbon prices, the EU Emissions Trading System is working as intended, and should not be amended further, writes Gordon Moffat. Otherwise, rising carbon costs will boost energy prices and make Europe’s industry less competitive in the face of international competition, he argues.
Gordon Moffat is director general of Eurofer, the European Steel Association. He sent this opinion piece ahead of a vote next week in the European Parliament on the Commission’s backloading proposal to support plummeting carbon prices.
"It seems necessary in these days to remind everybody how the EU Emissions Trading System came into existence and what it is meant to be: The scheme and its targets have been developed and agreed upon in full legislative process. It is supposed to be a cost effective, market-based instrument to reduce emissions from industry by 21% by 2020.
The objective is to reduce CO2 emissions, not to create a high carbon price. Altering this framework would raise serious doubts about the reliability of the legislation the European industry is working under.
The market for emission allowances is functioning. The price of allowances is the result of supply and demand, as in every functioning market. It is lower than expected, at present, because of the economic crisis. It will go up again once European industry has returned to growth. The ETS is working as intended. From today’s perspective Europe’s carbon targets for 2020 will be met in any case. This will then be a reduction of about 40% compared to 1990 levels for the steel industry in Europe. The rest of the world is doing little or nothing at all.
The Commission, however, wants to intervene. It wants to raise the price of allowances artificially. It wants to distort the market. Any increase in ETS costs will add to the operating costs for manufacturing industries that emit CO2 directly. And any rise in carbon costs will boost energy prices.
Costs imposed on energy providers will inevitably be passed on to private and industrial consumers. The EU itself has published calculations saying that for large energy users like the steel industry each Euro increase in carbon prices will result in an additional €190 million in energy cost. Competitors outside Europe do not have to bear such cost.
European industry has been struggling for almost four years now with recession conditions. Unemployment has climbed to 25.9 million or 10.7% in the EU 27 in December 2012, a historically high level. Deindustrialisation in Europe is already a fact. It is a reality for thousands of employees affected by a series of plant closures and massive staff reductions in the manufacturing industries in the past months.
Industry is moving away from Europe and companies explicitly state energy cost as the main reason for this. Investment is made in the US for example, where gas costs one third and electricity – half of what companies have to pay in Europe.
The European steel industry is faced with downward trends in all its main customer groups, whether these are automotive, mechanical engineering, construction or domestic goods. As a consequence, steel consumption in Europe has dropped by 5% in 2012. Future technological challenges for the EU, however, whether these are in mobility, infrastructure or energy, depend on innovative steels. The European steel industry is a world leader in technology and environmental protection. Steel supplies from outside the EU have a considerably larger carbon footprint.
It seems obvious that all political measures adding to the cost base of industry should be avoided in the present, dramatic situation. With its recent proposals, the European Commission is fuelling risk aversion and stifling growth.
Europe is not all about the ETS. It is also about the people and the economy on which Europe's prosperity builds. Backloading only costs money – without any incentive to invest in Europe.
Any structural adjustment of the ETS should be the outcome of a thorough review of longer-term objectives, including climate and energy as well as industrial aspects such as technical and economic feasibility. It is also necessary to pay attention to the global competitiveness of European industry."