EU ETS: Allocation rules will slow down economic recovery and the reduction of CO2 emissions

As the EU institutions are scrambling to meet the end-of-year deadline for the adoption of the benchmarks and allocation rules applicable to the free allocation of EUAs, the attention of most stakeholders, including industry, is essentially focused on the allocation process. The anxiety is palpable as everyone is asking: shall I have enough allowances to continue operate in the EU or not?

The proposed allocation rules come and will apply at a time when the EU manufacturing industry - particularly the cement industry - is struggling to recover from the financial and economic crisis. The start of the crisis took operators by surprise in the middle of an investment phase and, consequently, with a high gearing. In mature markets, such as the EU’s, the way out of the recession obviously has to go through a debt reduction and cost cutting exercise. In such context, it is vital that operators be given maximum flexibility to adjust production capacity to demand. This is also a unique opportunity to move production from less efficient installations to the most efficient plants, a capacity rationalisation that obviously goes hand in hand with the objective of reducing CO₂ emissions.

Will the proposed allocation rules facilitate this delicate transition? Unfortunately, voices in the analysts’ community are expressing doubt that they will. In fact, according to some sources, the ETSⁱ allocation rules are most likely to slow down the adaptation of European industry. The allocation rules will prompt operators to maintain artificially a sufficient capacity utilisation - of at least 50% - of existing installations for fear of losing allowances even though such low level of utilisation does make neither economic nor environmental sense.

Also, the European Commission’s refusal to adopt clear rules facilitating capacity transfer across borders will not help optimise capacity utilisation.

What the EU needs is strong economic government which, as in all democratic systems good government, rests upon checks and balances. Sometimes, unfortunately, the EU delivers legislation that is not well-balanced - focusing on one given goal exclusively - and not always subject to adequate checks. In this respect, however, a note of hope should be highlighted: DG ENTR played its true role in trying to reshape the allocation rules and Commissioner Tajani’s recent proposal for “competitiveness proofing” nurtures this hope.

The Communication “An industrial policy for the globalisation era” is available here:

http://ec.europa.eu/enterprise/policies/industrial-competitiveness/industrial-policy/files/communication_on_industrial_policy_en.pdf

See also reaction from the Alliance for a Competitive European Industry.
The ACEI press release