Making the case for ETS protection

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A short phrase on the need to protect industry is not the most newsworthy element of negotiations about Europe’s 2030 climate and energy goals but not surprisingly it is the part attracting most attention from some businesses.

Today, the CEOs of 60 European steel firms have a full-page ad in the Financial Times pressing their case. Like other energy-intensive industries, they’re asking EU leaders to ensure the most carbon-efficient plants in globally-competing industries are fully protected from the direct and indirect cost of cutting emissions.

EEF and UK Steel share their concerns about the cost of the EU emissions trading system and other emissions reduction measures and support calls for full protection for the most efficient 10% of plants in vulnerable industries.

Our members are committed to cutting their emissions, but exposing some of them to the full cost of EU climate and energy policies could prove devastating.

Protection levels under the ETS’s current ‘carbon leakage’ provisions are set to fall as 2020 approaches. Without some kind of replacement the European steel industry believes the ETS could cost it €70-100bn between 2020 and 2030.

This is a particular problem for sectors like steel competing in a global marketplace because they cannot share the cost of buying ETS allowances with their consumers. Contracts can be won or lost over £5/tonne of steel. The EU is aiming for ETS prices that would cost the industry more than £35/tonne in allowances.

At the same time, steel companies are major customers of the power industry, a sector that has a captive audience and does pass on ETS costs. Some EU countries, including the UK, compensate energy-intensive industries for these, but it is not obligatory.

This could sound like industry whingeing – why don’t steelmakers just cut their carbon emissions and energy consumption, and cut the burden that way? It’s not that simple. As the case study in our recent report on the ETS report explains, the most carbon-efficient EU plants are getting close to the theoretical limits of what can be achieved through current production methods.

A step-change may not be possible until the early 2030s and even then it will require massive investment in plants that are usually upgraded only once in a generation.

Force plants to pay too high a price for allowances now and the companies that own them won’t hang around in Europe to make that investment, even if they have the money to.

EEF and UK Steel think there should be a real incentive to improve efficiencies but only as far as what is technologically achievable. Pushing production, and investment, out of Europe will not meet goals to re-industrialise, puts local supply chains at risk, and is counter-productive from an environmental perspective as imports are likely to have a larger carbon footprint.

Even if EU heads of state include a promise to protect vulnerable industries when they agree the 2030 goals later this month, there are many ways in which the measures could work (see our report for our favoured ETS options). The European Commission has not yet begun drafting any proposals so expect to hear plenty more detailed discussions about the technicalities.

Author

Director of UK Steel

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