REACH
The European Parliament hopes to complete the 2nd Reading of the proposed REACH Regulations before the end of the year. During 1st Reading , EEF successfully obtained a number of specific amendments made to the proposal, especially on steel related issues. Our emphasis has now shifted to more general industry issues, as well as keeping a watch to preserve the amendments we have already successfully added.
The main focus of our ongoing discussions with MEPs concerns the approach that Parliament wishes to take towards authorising the use of hazardous substances. In particular the Parliament wants more emphasis placed on substituting hazardous substances and believes that any authorisations for the use of hazardous substances should be time-limited.
The Council of Ministers, in contrast, proposed an approach that allows a degree of flexibility for authorisations to be reviewed on a case-by-case basis and would not mandate substitution after a given time period. We believe that this is a much more practical approach given the range of different industries that will be covered by REACH.
We will therefore be asking the European Parliament to support the political agreement text drafted by the Council and thus avoid conciliation. The Parliament’s Environment Committee, which is leading on this proposal, is expected to finalise its report in the Autumn (possibly in October) and then the Parliament as a whole is likely to vote in Plenary before the end of the year (possibly in December).
Liberalisation of energy markets
The European Commission is expected to complete its enquiry into competition in the EU’s gas and electricity markets in the 2nd half of 2006, and this is likely to be followed by a series of ‘remedial’ actions.
Directives for opening up Europe's electricity and gas markets were adopted in 2003, and, at least in theory, industrial consumers have been able to freely choose their supplier since July 2004. However, some Member States have failed to implement the Directive and there seems to be persisting reluctance on the part of some incumbent energy utilities to grant access to new and foreign competitors.
The lack of liberalisation in continental markets has a direct impact on the security (and hence price) of UK energy supplies. The UK is a substantial net importer of gas during the winter period and is set to become more so as North Sea supplies continue to decline. Yet during winter 2005-06, gas failed to flow adequately through the Bacton-Zeebrugge Interconnector (which takes gas in and out of the UK) in response to price signals, despite spare capacity being available.
The result was that UK gas prices reached record levels, forcing a number of energy intensive gas consumers to suspend production. It is thought that a combination of physical constraints, contractual arrangements and public service obligations on continental suppliers (requiring them to withhold gas for national use) prevented gas reaching the UK market, to the detriment of UK consumers. Because of this situation, the UK currently has the highest wholesale gas (and hence electricity) prices in Europe despite being the largest producer of gas in the EU and having fully liberalised markets.
The solution to this lies partly within the UK (which is developing facilities to import gas from Norway and internationally via LNG terminals, and needs to expand its gas storage) but ultimately depends on open and equitable access to gas from continental markets.
The preliminary findings of the Commission’s investigations have suggested "serious problems" in gas and electricity markets. The Commission has real power in the competition field and with a number of ‘dawn raids’ having taken place on a number of high profile energy companies, the Commission, which is currently very keen to present itself as the consumers’ champion, seems likely to flex its muscles in this area. Parallel to the investigation the Commission is also expected to publish a progress report on the functioning of the internal energy market, including the possibility of further regulatory measures being taken.
EU ETS
The EU Emissions Trading Scheme (EU ETS) is Europe’s flagship policy for tackling emissions of carbon dioxide and meeting its Kyoto commitments. The scheme works on a "Cap and Trade" basis. Under this EU Member States are required to set a cap on carbon dioxide emissions from industrial sectors covered by the scheme. This National Allocation Plan (NAP) then sets a cap for installations covered by the scheme in order to create a shortage and true cost for carbon, thereby encouraging companies to emit less than they have been allowed. Pollution credits can be exchanged on an EU-wide carbon market allowing companies to make a profit from selling their excess.
The first phase of the scheme commenced on 1 January 2005 and runs until 2007. During Phase 1 of the scheme all sectors received free allocations, in accordance with their projected emissions. However the UK’s NAP proved controversial as it went a good deal further in capping emissions than many other Member States (meaning that UK industry had tighter targets to meet). As such, recent interim reports from Germany, France, Italy and other EU countries have shown that they have emitted far less CO2 than was anticipated in their NAPs. This surplus has caused carbon prices to fall, which in turn has meant less incentive for companies to cut down their emissions and free up extra credits. EEF believes that for EU ETS to be a success other Member States would have to make tougher targets under the second phase, particularly because a number are a long way from meeting their Kyoto commitments.
Member States were due to have handed in draft NAPs to the Commission by the end of June but, at the time of writing, only a handful have done so. When eventually submitted, NAPs will be assessed by the Commission with the intention of final plans being agreed before the end of the year.
Even at this stage it is clear that many Member States are likely to be extremely generous in allocations to their industries. The draft UK NAP released in June would give 238m allowances per year to British industries during Phase II, 7m fewer than the total distributed during the 1st phase. Seven per cent of these allocations will be auctioned but the Government has said that the electricity sector will bear the brunt of this while traded sectors, like steel, will be given the allowances they need. In contrast the EU’s biggest Member State, Germany, submitted a plan to the European Commission which experts say would only mean a 0.63% reduction of carbon compared with 2005. Moreover the German NAP does not include any auctioning and the limits will not apply to new power plants for 14 years from 2008.
In theory the Commission must approve NAPs but while Member States are legally obliged to meet their Kyoto Targets, EU ETS is not the only mechanism they have for doing so. Thus a Member State can submit generous NAPs if they can plausibly argue that other measures are helping them to meet their climate change targets.
EEF has been critical of the UK Government’s announcement. Whilst welcoming the fact that the electricity supply industry will bear most of the immediate burden through the auctioning of permits, we are concern that these costs will be passed on to businesses that are already paying amongst the highest energy prices in Europe. Firms covered by EU ETS therefore face the double whammy of complying with the scheme and paying higher energy prices. In addition, whilst re-iterating our support for the principle of ETS, EEF has been critical of the Government’s decision to push for reductions, which will leave the UK with significantly tougher targets compared to the rest of Europe and thus damages our competitiveness.
The UK will now begin work on a detailed installation-level distribution of allowances with the intention of sending its final NAP for European commission approval by early September. EEF’s focus is now firmly on the minutiae of the technical aspects of the UK’s NAP, but we will continue to press the Commission to be as tough as it possibly can on Member States who submit overly generous NAPs.
The EU also wants to widen the sectors included within ETS, possibly to include aviation. We believe that aviation has little potential to abate carbon emissions, resulting in the sector having to resort to buying carbon to make up the shortfall. The resultant surge in the price of carbon - which would have a large impact on manufacturers who also have little abatement potential - would be difficult for the manufacturing sector to pass on to its customers, leaving it with the unpalatable option of absorbing the cost.
Waste
As part of ongoing simplification measures the European Commission has proposed unifying measures previously contained within the Waste Framework Directive, Waste Oils Directive and Hazardous Waste Directive with one new Directive on Waste.
Waste and in particular the definition of waste is one of the oldest environmental issues at EU level. The high number of court cases in matters relating to waste proves that there is clearly a problem with its definition. The Waste Framework Directive is currently at 1st Reading in the European Parliament and EEF will be arguing that its first priority should be a new definition of waste. The EP’s Environment Committee is expected to vote on the proposal on 10 October with a vote of the entire Parliament in Plenary on 14 November 2006.