Concern over free CO2 allowances

Free CO₂ allowances allocated to a large number of industrial sectors at risk of carbon leakage could undermine incentives to move towards low carbon technologies under the EU's Emissions Trading Scheme (ETSⁱ), a Carbon Trust report suggests. The report claims that many industries named on the EU's list of 164 sectors at risk of carbon leakage are, in fact, unlikely to suffer significant leakage. Commission Decision 2010/2/EU determining a list of sectors and subsectors deemed to be exposed to a significant risk of carbon leakage was published in the European Union’s Official Journal (OJ) in December 2009. The cement industry qualifies as a sector vulnerable to carbon leakage on the basis of an increase in production cost, directly and indirectly induced by the ETS, in excess of 30% of GVA, an increase amounting to 45.5% in the cement sector.

The Carbon Trust report estimates that giving free allowances to the cement, steel and aluminium sectors - the sectors most at risk from carbon leakage - could increase the carbon price for the rest of industry by 10-30%. It calls for a border mechanism for cement, which it believes would be more effective than issuing free ETS allowances.

CEMBUREAU welcomes the confirmation in the report that the cement sector is genuinely vulnerable to carbon leakage. It also welcomes the recognition that emission reductions via carbon leakage undermine the EU ETS and its environmental effectiveness. However, whilst it accepts that a sector specific approach is needed to deal with carbon leakage, the analysis falls short of assessing the potential problems with treating sectors differently when competing in the same market such as, for example, steel or flat glass vs. Cement/concrete in construction.  In addition, CEMBUREAU does not agree with the notion that continued free allocation would result in windfall profits. Whilst importing clinker is possible to make cement, it results in carbon leakage and potential job losses in the long term and is thus not a sustainable business option.

CEMBUREAU also rejects the assumption that output based allocation reduces the desire to substitute clinker in cement. A high and sustained carbon price provides an incentive to clinker producers to use less clinker and sell CO₂. However, it should be noted that specifiers of structural concrete often require minimum clinker cement content.  In addition, the Association disagrees with the suggestion that a Best Available Technique based benchmark is used to level at the border. The problem with using a BATⁱ benchmark is that importers will pay the CO₂ cost of the best plants (potentially the ‘top 10% most efficient’): this means that they have an advantage over most of the domestic producers.
 
The report also significantly overstates the level of abatement potential in the cement sector. 60% of the emissions are from the calcination process and only 40% of the total emission is from combustion. Process emissions are largely irreducible. This means that any reduction applying to the whole emissions attracts a 2.5 times greater effort on the combustion emission.  It also inaccurately reflects the difference between cement and clinker where the chart (on page 22 of the report) does not acknowledge the electricity required for cement production. In addition, the report underestimates the impact of full auctioning on the sector.

The report recognises that trade intensity (particularly with China) has increased during the early part of the EU ETS. However, the report does not explore that this leakage has occurred even at low carbon prices and that increased carbon prices could accelerate leakage. CEMBUREAU does not agree with the assumption that cement and clinker trade intensity will not change with increased levels of auctioning.  It also disagrees with the assumption that cement plants are not capital intensive investments. A modern newly built cement facility could cost around €250m in Europe today, appreciably higher than a Chinese equivalent.

CEMBUREAU therefore recommends that Carbon Trust also take into consideration the sector specific research carried out by independents, such as The Boston Consulting Group.  The BCG analysis carried out for CEMBUREAU stated that CO₂ prices above €35/t (expected for the 2013-2020 period) will leave the European industry vulnerable to complete off-shoring. At CO₂ price of €25/t, more than 80% of EU clinker production will be at risk of off shoring by 2020.

Commission Decision 2010/2/EU can be found here:
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2010:001:0010:0018:EN:PDF