UK steel industry gives a cautious welcome to the Commission's proposals on Emissions Trading Scheme

Our concern has always been that if a badly-designed ETS forced European steel companies to incur additional costs compared with competitors in non-carbon constrained economies, this would lead to the progressive erosion of our competitive position and thus an increase in global emissions. We are therefore relieved that the Commission has accepted the legitimacy of our case by keeping the door open for 100% free allocation.

The industry also welcomed the proposal to harmonise the scheme at EU level. This will remove the competitive distortions that result from the current system of national allocations.

On the proposal to assess by 2011 whether measures will be necessary to impose carbon pricing on imported products, we would support border measures that are WTO-compliant and therefore do not trigger a trade war. Adopting a benchmark-based system for EU allocations would make it very much easier to construct WTO-compliant border measures.

The steel industry does however still have some concerns. It is not clear that the sector will receive enough allowances to meet its needs. While we understand the necessity of making the total cap progressively tighter, the Commission must ensure that at the sectoral level, allocations reflect the technological abilities of each sector to reduce its emissions.

The Commission recognises that power generators can and will pass on their carbon costs in full to their customers. With carbon prices set to rise significantly, this will place a severe burden on steel companies using the electric arc furnace process route. The preamble to the directive now opens the door to giving additional allocations to electricity-intensive manufacturers if it can be demonstrated that this is the only way of preventing carbon leakage. This language is not however repeated in the draft Directive itself, so further clarification is required.

The European steel industry has already reduced its CO2 emissions by 60% between 1970 and 2005. Since 1990 (the base year for the Kyoto agreement) the reduction has been 21%. (This compares with the EU's Kyoto commitment of an 8% reduction by 2008 - 2012 and its target reduction of at least 20% by 2020.) The sector is rapidly reaching the point where, with today's available technologies, further significant reductions are impossible. With this in mind, the sector is investing millions of euros in researching potential break-through technologies. This will not however yield any short to medium term solutions.

The extent to which the steel sector is exposed to international competition and therefore vulnerable to any requirement to purchase carbon allowances has been confirmed by a number of independent studies - most recently by the Carbon Trust.

The cost of buying CO2 allowances at today's price is equivalent to an increase in steel production costs of over 10%. The cost of allowances post-2012 is expected to be much higher. In today's competitive environment, if foreign producers are not subject to the same costs, EU companies will rapidly lose market share for that portion of their output for which they are obliged to purchase allowances.

Graphs illustrating some of these points are available here