2016 marks a crunch year for the future of the EU Emissions Trading System (ETS). The European Parliament’s ambitious timetable has the post-2020 reforms being agreed to by year’s end. The European Commission’s proposal published in the summer of last year fell a long way short of what many in industry had hoped for, especially for energy intensive trade exposed industries. Despite claims to the contrary, it demonstrably fails to even safeguard Europe’s best performing sites.
The arbitrary nature of benchmark reductions, the reintroduction of the cross sectoral correction factor which cuts the free allocation of allowances regardless of a site’s emissions performance and not properly accounting for increased electricity prices will all expose industries such as steel to the risks of carbon and investment leakage.
To give an indication of the potential impact, a recent assessment showed that the Commission’s proposal would result in €34 billion in direct and indirect carbon costs for the steel industry across the EU over the period 2021 to 2030 including €2.3 billion (£1.7 billion) for the UK’s steel industry. Given UK and EU steel companies are price takers facing ever increasing international competition, such costs simply couldn’t be passed on. Margins would be slashed.
The proposal also flies in the face of the Commission’s own push for a “European Industrial Renaissance” which is supposed to be a “clear signal of its commitment to reindustrialisation, the modernisation of Europe’s industrial base and the promotion of a competitive framework for EU industry”.
It must be said that even as we transition to a low carbon economy, energy intensive industries will continue to play a critical role. Steel for example will remain fundamental to building the increasing number of wind turbines, transmission towers, trains and electric powered vehicles which will be required. If not made in the UK or even in Europe in a highly carbon-efficient manner, steel consumption would remain unaffected, production offshored and global emissions increased.
To begin to rectify the Commission’s proposal, the cap on free allocations needs to be reassessed as it’s clear that there are not going to be sufficient allowances available to properly protect trade exposed industries despite previous promises. An evidence based approach is also required to ensure free allocation is properly targeted.
"The EU’s policy to combat climate change should be a contributor to the Commission’s ambition for an industrial renaissance."
With respect to the best-performance benchmarks and the proposed annual reductions, both fail to reflect what each industry is economically and technically capable of achieving. If the benchmarks are not realistic, the ETS simply becomes a tax on un-abatable emissions.
While you often hear of industry craving certainty, they don’t want the certainty of a bullet. The Commission’s proposal and the implications of it needs to be carefully considered by MEPs and member states. If the EU Parliament’s proposed timetable slips into next year, so be it. This is too important an issue to be rushed.
The ETS as the supposed cornerstone of the EU’s policy to combat climate change should be a contributor to the Commission’s ambition for an industrial renaissance. However, the reform proposals as they stand, poorly designed and ignoring commercial realities, have the potential to do the complete opposite.
Further information on UK Steel’s position can be found here.