Strategic choices for ETS Post-2020: Allow energy intensive industries to be competitive and grow in Europe
The Alliance of Energy Intensive Industries, representing over 30.000 European companies and 4 million jobs, wishes to be an active contributor in the upcoming revision of the EU ETS. This paper contains Alliance proposals on carbon leakage protection, free allocation principles and competitiveness under ETS Phase IV to ensure simple, fair, predictable and effective rules i.e.:
- Carbon leakage protection needs to be the first element of the ETS revision based on the same criteria and assumptions as under Phase III, as well as on technically and economically achievable benchmarks;
- An EU-wide harmonized system must be put in place, which fully off-sets direct and indirect costs at the level of the most efficient installations in all Member States; therefore, no cross-sectoral correction factor should be applied to free allocation;
- Allocation methodology must be closely aligned with real/recent production levels;
- Innovation support must be extended to industrial sectors;
These principles are fully compatible with the March and October 2014 European Council Conclusions and reflect the industry contribution to the Commission questionnaire, following the meeting with Commissioner Arias Cañete in February 2015. Those principles are further detailed below.
Best industrial performers must not be penalized by ETS allocation rules
The concept of declining free allocation for industry is in contrast to the need for full protection against carbon leakage and should not serve as a justification to reduce protection. The limit on the total issuance of allowances in ETS sectors defined by Heads of State and governments covers both free allocation and auctioning. They did not impose a decrease of free allocation as such. On the contrary carbon leakage provisions should be improved in order to encourage carbon-efficient production and growth in Europe, and allocation must be guaranteed at the level of realistic benchmarks. Only predictable and effective carbon leakage measures will enable companies to invest in innovative solutions in Europe.
Accordingly there should be no direct and indirect cost at the very least at the level of most efficient European installations in sectors at risk of carbon leakage.
The effect of the cross sectoral factor (CSCF) is that even the best performers cannot achieve these levels due to economic, technical or thermo-dynamical limits. Ignoring this turns the EU ETS into a penalty system rather than an incentivising system.
For that reason, all our sectors call for a deletion of the CSCF, in accordance with the European Council conclusions of 23-24 October 20141.
Current carbon leakage assessment methodology remains valid
The carbon leakage risk will not decrease and may well increase on the contrary:
- It can currently not be expected that there will be a large breakthrough in negotiations at international level that would lead to climate policies, imposing equivalent carbon costs for industries located in competing regions.
- Meanwhile, the GHG reduction target will be increased to 43% for EU ETS sectors compared to 2005 levels (meaning that the cap will be tightened)
- The Market Stability Reserve will result in rapid carbon price increases.
All Energy Intensive Industries should receive full protection at the level of the benchmark. Consequently, the quantitative and qualitative carbon leakage risk assessment criteria and assumptions as defined in 2008 remain fully valid and must remain unchanged. Energy Intensive Industries are characterised by long investment cycles. The carbon leakage list must only be updated at the beginning of each trading period.
Also, since the risk of carbon and investment leakage remains as acute as ever for EU industry, introducing differentiation in the level of protection will lead to unequal and incomplete protection for sectors at risk, and could have negative repercussions on EU industrial value/supply chains.
Establishing technically and economically achievable benchmarks
The benchmarks should be updated maximum once, ahead of each trading period to provide planning certainty for participants, decrease the administrative burdens and provide an appropriate reward for those that have invested in emissions efficiency.
The update of the benchmark values should be based on data collection from the EU companies. The process of establishing benchmarks must be as transparent as possible. If in a sector, no relevant changes in technology have taken place, such sector can request a simplified approach for data collection.
These benchmarks have to be representative for the sectors and based on representative technologies that have been adopted by the European market. Over-ambitious benchmarks artificially increase costs to industry overall and de facto undermine the effectiveness of the carbon leakage provisions. The current rules are already very stringent, as benchmarks are set according to the average of the top 10% most efficient installations in the sector; hence, even without the cross-sectoral correction factor, around 95% of the installations have to purchase allowances.
Indirect carbon costs need to be fully compensated throughout Europe
The current implementation of carbon leakage measures to deal with indirect carbon costs has resulted in a fragmented approach as eligible sectors exposed to electricity price increases due to carbon costs may only receive from few Member States a partial financial compensation. This creates an uneven playing field in the internal EU market, and creates a disadvantage for those installations that are not receiving any, or only partial, compensation, vis-à-vis extra-EU competitors.
While designing the new system, several measures/principles should apply:
- EU-wide harmonized system, which fully off-sets indirect costs (100% of the CO2 cost-pass through in electricity prices) at the level of the most efficient installations in all Member States and reflects most recent production levels. Sectors with a fall-back approach should also be properly treated.
- Cost compensation could be assured using different complementary mechanisms (free allocation and/or harmonised financial compensation).
- Mechanisms should ensure predictability over the entire trading period by being described in the revised directive. The current system is unpredictable, as it relies on a state aid compensation assessment, and is granted annually, digressive and uncertain for future years.
- The eligibility assessment for such an EU-wide scheme should be based on a consistent methodology that identifies qualified sectors on the basis of their exposure to indirect carbon costs or their total electro-intensity.
- As indirect costs arise from the price setting mechanism prevailing in the power sector (marginal price setting), an EU-wide compensation scheme should be in place without delay.
For the longer term, the Commission should also assess the possibility of redesigning the electricity market in a way that prevents carbon cost pass through in electricity prices to sectors at risk of carbon leakage.
System based on real/recent production must replace the ex-ante straightjacket approach
Moving to an allocation methodology closely aligned with real/recent production levels would provide the required allowances at the level of the benchmark to companies expanding or restarting production to avoid undue costs, help prevent over- or under-allocation, stop rewarding ETS participants for moving production overseas and ensure simplified and fairer rules as regards new entrants, capacity increases or decreases, plant rationalisation and partial cessation. For example, the reference period could be the rolling year n-2. The required production data are already available as verifiers have to ascertain the activity data needed for the allocation. The bureaucratic burden will be therefore minimal.
For installations covered by fall-back approaches as opposed to benchmarks, emission reductions resulting from efficiency measures should not result in a penalty.
Creating a reserve for growth
To ensure sufficient availability of allowances for free allocation for industry, a reserve for growth would be needed. This reserve for growth would act as a buffer to ensure predictable access to both free allocation and auctioned allowances.
There are several ways to operate this proposed reserve for growth:
- It can be filled with unused free allowances due to lower production in phase III, back-loaded allowances, un-allocated allowances from New Entrants Reserve. Then it can provide allowances for growth in case of higher production.
- In addition, the Market Stability Reserve could also be used as the source for granting such allowances, if it would be designed as a sink for unused allowances from which allowances could be released for said purpose.
Support to innovation
The extension of innovation support to industrial projects is welcome. However, it should not happen at the detriment of carbon leakage protection by reducing or limiting the amount of free allocation. Industry exposed to carbon leakage risk will struggle to invest or innovate without predictable efficient carbon leakage protection.
The revenues from auctioning should be reinvested for low carbon technology support, as foreseen in the ETS Directive, or energy efficiency, but more importantly they should be used by Member States to stimulate economic growth and relevant R&D investments. Innovation funding under EU ETS should be allocated to energy intensive sectors appointed in Annex I of the directive. The NER400 should be technology-neutral and refer instead to R&D and deployment of new technologies for those Annex I sectors.
In order to achieve a realistic policy and to allow for effective reduction of emissions, there is a need to identify the abatement possibilities in the industry (linked to technological, thermo-dynamic and physical/chemical limits that cannot be overcome due to feedstock, process emissions and lack of break-through technologies). Some sectors have already developed 2050 decarbonisation roadmaps, in which transformation technologies are mentioned. A dedicated fund taking into consideration these abatement possibilities will bring innovative technologies (e.g. industrial breakthrough technologies, including CCS and CCU for industry) forward and secure buy-in of industry sectors.
Industry needs an objective impact assessment for Phase IV ETS
In light of the better regulation policy of the new Commission, an objective impact assessment on the different European energy intensive industries is crucial, taking into account their ability to reduce emissions (low carbon roadmaps). Any flawed impact assessment could lead to wrong policy decisions for the energy intensive industries in Europe.
1 See legal opinion on article 2.9 by Luther of April 2015
Background: On 24 October 2014, the European Council agreed on the 2030 framework for climate and energy, including a binding domestic target for reducing greenhouse gas (GHG) emissions of at least 40% in 2030 as compared to 1990. To meet this target, the European Council agreed that the emissions in the EU Emission Trading System should be reduced, compared to 2005, by 43%. A reformed EU ETS remains the main instrument to achieve the emission reduction target. The cap will decline based on an annual linear reduction factor of 2.2% (instead of the current 1.74%) from 2021 onwards, to achieve the necessary emission reductions in the EU ETS. The European Council furthermore gave strategic guidance on several issues regarding the implementation of the emission reduction target, namely free allocation to industry, the establishment of a modernisation and an innovation fund, optional free allocation of allowances to modernise electricity generation in some Member States.
The strategic guidance given by European leaders on these elements will be translated into a legislative proposal to revise the EU ETS for the period post-2020. This constitutes an important part of the work on the achievement of a resilient Energy Union with a forward looking climate change policy, which has been identified as a key policy area in President Juncker's political guidelines for the new Commission.
The purpose of this stakeholder consultation was to gather stakeholders' views on these elements.
CEPI's Key messages :
- The ETS in general, and the benchmarks in particular, should reward installations and sectors reducing GHG emissions, without penalising early movers, new investment made, and low-carbon economic growth. Fiscal and legislative stability and predictability are needed to enable investments in low-carbon technologies.
- The pulp and paper industry cannot pass through carbon costs to its customers: the global market of export goods sets prices, not the production costs of the European industry. This can be easily verified by the lack of correlation between carbon prices and final product prices.
- For “direct carbon costs”, free allocation is a necessary condition but not sufficient to avoid carbon leakage: support mechanisms should be set up to help the EU industry improve its energy efficiency and reduce its GHG emissions.
- Concerning “indirect carbon costs”, it would be better for a mandatory and harmonised EU-wide compensation scheme to address the impact of rising electricity costs due to ETS in all Member States. Financing of compensation schemes should include also, but not be limited to, auctioning revenues from ETS.
- Support for innovation in industry should not come at the expenses of carbon leakage protection: funding for innovation will have to come on top of free allowances for industry. It should be directed to directly finance large-scale demo and pilot projects, as well projects close to commercialisation stage (TRL 6-8). These are high risk, high capital investments where the private sector would not be able to deliver without the backing of public financing.
- The role that European industry plays in the circular economy and in the bioeconomy is of strategic importance for Europe’s access to raw materials and reducing Europe’s carbon footprint. This should be acknowledged when reviewing the EU ETS, by addressing the ETS impact on prices and availability of raw material, such as wood.
Read the full reponse.
Last chance for energy markets - Member states’ support key to its success
The Confederation of European Paper Industries (CEPI) strongly welcomes the Energy Union Package published today by the European Commission. CEPI especially welcomes the emphasis put on delivering competitive energy prices, investing in the bioeconomy and establishing synergies between the energy efficiency, resource efficiency and circular economy policies.
“This package is the last chance to make energy markets in Europe work”, says Marco Mensink, CEPI Director General. The success of the Energy Union no longer depends on the Commission, but on member states’ willingness to “walk the talk”. CEPI expects national governments to urgently give their support to make the package a reality. A strong EU energy regulator is part of the solution. “In this case, ‘more Europe’ is the answer to the industry and consumers’ need for affordable and competitive energy,” he added.
The package not only recognises that energy costs for industry in Europe are uncompetitive, it also acknowledges that the root of the problem lies in the levies, taxes and additional costs energy consumers are charged for by the member states. If no measures are taken, the need for capacity payments will add yet another layer of costs, affecting all European energy consumers.
CEPI has great expectations for a number of key elements to be later defined in the package proposal. The Commission indicates renewable support schemes would need to be rationalised. The system of subsidies for burning wood for energy can no longer be sustained. Furthermore, establishing an EU biomass supply policy is urgently needed. In addition, energy recovery from waste should be limited to non-recyclable fractions, in line with the waste hierarchy and the requirements for separate collection.
Among the first proposed actions, the Emission Trading System reform offers the possibility to turn the ETS into a tool that rewards investments in low-carbon technologies, while ensuring industrial competitiveness. Engaging industry in this process is crucial. Moreover, the Energy Union should support industrial co-generation, recognising its role in delivering demand side flexibility. This should be part of the combined initiative on the internal energy market, together with the review of the Energy Efficiency Directive and the Guidelines on State Aid for Environmental Protection and Energy.
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Note to the author:
European Commission: Energy Union: http://ec.europa.eu/priorities/energy-union/index_en.htm
The Alliance of Energy Intensive Industries (AEII) has published an open letter to the heads of State and Governments of the EU Member States, the European Parliament, the Council of the European Union and the European Commission on carbon leakage. CEPI is part of this alliance.
The 2030 climate and energy framework must guarantee predictability for industry by setting the principles for measures against carbon and investment leakage now.
The undersigned manufacturing industries are the foundation of Europe’s economic fabric, drivers of jobs and growth in Europe. We represent over 30 000 companies in the EU with more than 4 million direct jobs, and around 30 million jobs in our manufacturing value chains.
The EU should focus on promoting recovery and growth of industrial production in Europe, in line with the objective to reinstate industry’s share of EU GDP to 20% by 20201. European industries need a stable and long term legislative framework that effectively combines EU climate ambition with EU industrial competiveness.
Current carbon leakage provisions under the EU Emissions Trading Directive, if not revised rapidly, will result in a huge shortage in free allowances and increasing direct and indirect costs (the pass-through of carbon costs into power prices) for even the most efficient installations in Europe. In the period from 2021 to 2030, when the provisions against carbon leakage and free allocation would be phased out, our industries are expected to face hundreds of billions of Euros in direct costs and costs passed through in electricity prices.2 The impact on energy intensive industries will simply be overwhelming.
Knowing that the Commission will be looking at “an improved system of free allocation of allowances with a better focus” for 2021-2030 is not enough. Industry needs a clear outline of policy measures to effectively prevent the risk of carbon and investment leakage.
The Commission’s legislative proposals currently only cover EU ETS structural reforms, which increase both carbon prices as well as the unilateral burden on EU industry, and expose EU jobs and growth to aggravated carbon leakage risk. Unfortunately, the Commission intends to publish proposals to prevent carbon leakage only at a later stage.
This is contrary to the guidance resulting from the March 2014 European Council, instructing the Commission “to rapidly develop measures to prevent potential carbon leakage in order to ensure the competitiveness of Europe's energy-intensive industries”, and this to provide by October 2014 “the necessary stability and predictability for its economic operators”.
The European Parliament stressed in February 2014 “that the 2030 climate and energy policy targets must be technically and economically feasible for EU industries and that best performers should have no direct or indirect additional costs resulting from climate policies; [that] the provisions for carbon leakage should provide 100% free allocation of technically achievable benchmarks, with no reduction factor for carbon leakage sectors.” 3
We therefore urge the European Council to give guidance at its summit on 23/24 October confirming that carbon leakage measures will be continued after 2020, as well as outlining the principles for the level of protection in order to safeguard predictability, investment certainty, jobs and growth in Europe:
Until a global agreement on climate change provides for a level playing field for energy intensive sectors at risk of carbon and investment leakage, best performers should not be penalised by direct or indirect additional costs resulting from the framework. This implies:
- Truly 100% free allocation based on technically and economically achievable benchmarks (including heat and fuel based benchmarks), reflecting recent production, and without a correction factor.
- Harmonized off-setting of all CO2 costs passed through into electricity prices in all Member States.
The Market Stability Reserve must only be considered in conjunction with the above measures, instead of through piecemeal approach.
The undersigned energy intensive industries are all at risk of carbon and investment leakage and therefore must be safeguarded through the above measures.
These measures provide the essential signal towards industry for predictability and investment certainty, and secure an environmentally and economically sound EU ETS which does not distort the market. We strongly believe that these measures, together with strong innovation funds to support breakthrough innovation in industrial technologies and processes, will offer a win-win situation for the global climate and the European economy.4
1 European Commission Communication "For a European Industrial Renaissance", COM(2014) 14/2
2 The Commission expects a price of €40/tCO2 in 2030, modelling presented by Point Carbon expects ca. €48/tCO2 (source: www.ceps.eu/taskforce/review-eu-ets-issues); Climate Economics Chair calculates a price of up €70/tCO2 in a high scenario in its report EU ETS reform in the Climate-Energy Package 2030: First lessons from the ZEPHYR model, Paris 2014.
3 European Parliament resolution of 4 February 2014 on the Action Plan for a competitive and sustainable steel industry in Europe (2013/2177(INI))
4 The agreement on the reform of the EU ETS between the Dutch government, industry and NGOs proves that a compromise and a balanced solution between the pillars of EU sustainable policy – growth, jobs, and environmental protection – is possible by applying an allocation more closely linked to economic reality e.g. a dynamic emissions trading system.
CEPI comments on the draft EU guidelines on environment and energy aid
It is unwise to raise costs for the industry to promote competition in the internal market, by doing so Europe will lose competitiveness in the global market.
CEPI therefore calls the European Commission to urgently modify the proposed draft guidelines on environment and energy aid for 2014-2020, in order to:
• allow 100% aid intensity for cogeneration;
• do not cap exemption from electricity price increases due to support for renewables;
• do not change definition for energy intensive industry.
The Guidelines on environment and energy aid for 2014-2020 will be an essential tool for reaching the ambitious 2020 energy and climate goals in a cost-effective manner. It is therefore important to promote low-carbon investments while preventing distortion of competition.
The European Commission should scrutinise the impact of proposed measures on the overall EU industrial competitiveness. Preventing intra-EU distortion of competition is important. But in a global competitive market, EU industry is faced with costs unmatched by other economies.
CEPI asks the European Commission to urgently correct three main issues.
First, allow 100% aid intensity for cogeneration.
The European Commission cannot adopt interpretative guidelines derogating from EU law. Art. 15 of the Council Directive 2003/96/EC (the so-called “Energy Taxation Directive”) specifically allows Member States “total or partial exemptions or reductions in the level of taxation” for energy used and electricity produced from combined heat and power generation (so-called “cogeneration” or “CHP”). However, the draft guidelines propose restricting investment and operating aid for cogeneration installations (from para. 17 onwards).
Such a restrictive interpretation is not only contrary to EU law, but also to the overarching 2020 energy-climate policies, where promotion of cogeneration is a key element of energy efficiency policies. It is arbitrary, inappropriate and acts as a disincentive for cogeneration, and the promotion of energy efficiency.
Second, do not cap exemption from electricity price increases due to support for renewables.
The draft state aid guidelines propose capping aid for industry at 85% for increased costs to support renewable energy sources (RES). This proposal in unacceptable for two main reasons:
1. From an environmental perspective, there is no link between the additional cost associated to RES promotion and the behavioural change expected by the beneficiary (industry) to achieve this environmental objective. Although RES contribute also – but not exclusively – to the environmental objective, the redistribution of costs within society is a social policy, where competency lies with the Member States;
2. The cost of promoting RES varies across Member States, even for the same technology. The cost depends on geographical conditions and on the way it fits into other cost components in the electricity bill, such as: national energy mix, network charges, other taxes and levies. Tackling just one component of the overall electricity price will not address intra-EU competition. On the contrary, an additional cost promoting RES set at EU level has the potential of further increasing market distortion.
Third, do not change definition for energy intensive industry.
The Energy Taxation Directive clearly defines “energy-intensive business” a business entity “where either the purchases of energy products and electricity amount to at least 3,0 % of the production value or the national energy tax payable amounts to at least 0,5 % of the added value” (Art. 17).
However, the draft state aid guidelines introduce a different definition of energy intensive industry, setting higher thresholds (10% trade intensity and 5% tax costs/gross value added). The new thresholds are based on carbon leakage criteria set in the EU Emission Trading System (ETS).
Such an interpretation is arbitrary and conceptually not correct. The carbon leakage criteria are meant to protect EU industry from unmatched costs from third countries. It looks at global competition. The state aid guidelines look at intra-EU competition. The basis for assessing distortion of competition cannot be the same.
The definition of energy intensive industry in the state aid guidelines needs to match the definition in the Energy Taxation Directive to avoid legal uncertainties distorting the internal market.
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