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CEMBUREAU views on recent EU-ETS developments

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The EU-ETSi is still very much at the top of the EU agenda and, consequently, of that of CEMBUREAU. In this editorial, we are looking at some current developments on which CEMBUREAU has a view.


EU-ETS and Aviation: Is the EU wise to fight the rest of the world?

Over the last few months, the tension between the EU, led by Climate Action Commissioner Connie Hedegaard, and the rest of the world i.e. China, India, Brazil and notably the USA, has not been appeased. On the contrary, further to the support given to the Commission’s view by the European Court of Justice (ECJ Judgement in Case-C366/10 of 21 December 2011 Air Transport Association of America and others V Secretary of State of Energy and Climate) the scene is set for a bloody fight from which it is far from certain that the European Commission would emerge unscathed.

The extension of the EU-ETS to CO2 emissions from international flights has led to many protests. In the US a legislative proposal that would provide legal grounds for injunctions forbidding US airlines to comply with the European legislation. In China, the State Council has barred the country's airlines from complying with the EU-ETS. Questions are also being raised in WTO about compliance of the EU-ETS with WTO rules which now seem to go beyond the aviation issue itself as free allocation is in itself queried.

Diplomacy, it is true is, often a slow process but how can such a deadlock emerge in spite of a usually well oiled trans-Atlantic dialogue? Was it wise to proceed without the essential reassurance from key trading partners? Rather than seeking pacification, the European Commission has escalated the dispute and it has done so in the face of public opinion on all sides. Now the room for manoeuvre is virtually zero as the European Commission cannot back track. It has to apply the law it has created even though one may doubt whether it can be victorious in this arm wrestling.

The European Commission is now considering extending the EU-ETS to emissions from shipping and has started a consultation process on how this could be done on 19 January 2012: “Including maritime transport emissions in the EU's greenhouse gas reduction commitment”. Let us just hope for more wisdom in this new initiative. (More information: Eurobrief articles “ETS: Inclusion of aviation valid” and “Commission consultation on inclusion of shipping”).


ETS – CEMBUREAU responds to Consultation on State Aid

The ETDi provides that Member States may grant State Aid to energy intensive industries recognised as at risk to Carbon Leakage in order to compensate higher electricity costs induced by the EU-ETS. To achieve this, a revision of the State Aid Guidelines is necessary and DG COMP has launched a consultation on a draft Communication which will be the vehicle for the new Guidelines, a matter that falls entirely within the Commission’s own executive powers.

The European Commission has to determine the conditions under which State Aid will be permissible and purports to establish a list of sectors that will qualify. This will be done primarily on the basis of a quantitative assessment: in order to qualify a sector has to show that trade intensity is of at least 10% and that the impact of the higher electricity cost represents at least 5% of GVA in the sector.

DG COMP have indicated that no new calculations will be made in the quantitative assessment. The findings for the years 2005 – 2007 made in 2009, when the carbon leakage list was adopted, will be used as such. It means that the European cement industry, with a trade intensity of 6.8% and an impact of electricity price of 4.4% of GVA, as assessed in 2009, does not meet the quantitative criteria set by DG COMP.

CEMBUREAU argues that the cement industry should qualify for State Aid under a qualitative assessment. In such case, the GVA impact required to qualify may go down to 2%. The problem is trade intensity. Here CEMBUREAU argues that some flexibility is also required, as on the GVA percentage, when it is clear that it is impossible to pass-through the extra cost to customers and that freight costs to the EU will not

prevent imports. These points, which are required for a qualitative assessment, have been developed by BCG showing that, while electricity prices in Europe grew by an average of 30% from 2005 – 2009, cement prices barely increased and even decreased in real terms over the same period if the inflation is taken into account.

The above points and other criticisms of the method used by DG COMP have been submitted by CEMBUREAU at the end of January. CEMBUREAU also relied on the analyses by BUSINESSEUROPE and IFIEC Europe.

More information:European Commission consultation


The 2014 review of the Carbon Leakage list should not rock the boat

In 2014, the European Commission, led by DG Climate Action, will proceed with the review of the Carbon Leakage list established by Commission Decision on 24 December 2009. CEMBUREAU and other energy intensive industries have made their views know to the Commission.

Under the ETD, reviews are planned every 5 years primarily in order to take account of progress made towards meaningful international climate change treaty. If Durban may prove useful, in that there has been an agreement to agree in the future, Durban does not practically alter the present situation: the EU is still going it alone with its ETS.

There is therefore no real need for an in-depth questioning of the present list of industries vulnerable to Carbon Leakage. The price of CO2 has of course gone down, but the ETD provides that the reference price to be used in the review must be the average price used in the Impact Assessment of the Directive when it was revised on 23 April 2009 i.e. € 30 per tonne of CO2.

In CEMBUREAU’s opinion, there is no reason to change the other parameters used in 2009 i.e., the assessment at 75% auctioning and a CO2 emission factor for electricity production of 0.465 tonnes of CO2 per MWh.

Rocking the boat by going away from those parameters would not be justifiable as the EU-ETS is an ex ante system with no ex post adjustment. The economic crisis has shown that this rigidity is excessive. It would have been wise to heed CEMBUREAU’s advice when, back in 2002 – 2003, we were arguing that a provision for ex post adjustment, one way or the other, was compatible with the Directive provided that the total volume of EUAs is identified and allocated ex ante. This point was later confirmed by the European Court ECJ Judgement in Case-T374/04 of 7 November 2007 Germany V Commission but, unfortunately for the State of Law, too late.


The High Court defines the legal nature of EUAs

Ever since the Emission Trading Directive was adopted, in 2003, lawyers have asked themselves what is the legal nature of EU CO2 allowances (EUAs).

On 11 January 2012 the High Court (the England and Wales High Court is the common law court exercising original jurisdiction) brought a first answer. It did not, however, think it fit to refer the matter to the European Court for a preliminary ruling thereby depriving stakeholders from a confirmation devoutly to be wished. [Case No: HC10C00532 - Between Armstrong DLW GMBH and Winnington Networks Ltd]

The decision of the High Court makes sense. Seized with a law suit brought by a German company whose EUAs had been stolen and resold by an English broker, the High Court held that EUAs are a form of intangible property and that, therefore, the owner victim of the theft was entitled to damages from the broker. This holding is based on a triple test: EUAs represent exemptions in respect of emissions otherwise forbidden; they are granted under a statutory framework which also provides for their transfer and they have an economic value. CEMBUREAU draws the attention to the fact that the Court’s analysis may have broader implications than compensating victims of theft. It would indeed seem possible to counter that any taking away EUAs that have been allocated would amount to an infringement of property rights even if such taking was carried out by a public authority.

More information: March 2011 Eurobrief Editorial - Carbon Finance