NOx & SO2 trading - CEMBUREAU position on Entec study

Entec study for the European Commission

Industry has already expressed its position against an EU-wide trading scheme for NO_x and SO₂ emissions based on very strong reservations about the putative environmental and economic benefits of such a scheme. 

A key point is that industrial and other emissions of these gases are already effectively regulated under several international agreements, European directives and national measures, such as taxation. A trading scheme would bring double regulation and generate unnecessary costs.

On 10 February 2010, the European Commission (DG-ENV) organised a stakeholder consultation meeting on NO_x and SO2 trading during which the Entec study “Assessment of the possible development of an EU-wide NO_x and SO₂ trading scheme for IPPCⁱ installations” was presented. The meeting was attended by representatives of the Member States, NGOs and industry, including CEMBUREAU.

The draft report on the first study does not make a convincing case and does not provide clear and satisfactory responses on a number of vital points.

Furthermore, CEMBUREAU has identified a clear error in the Business-as-Usual (BAUⁱ) and REFERENCE SCENARIO emission assumptions for the cement sector.

Cement sector erroneously key for trading

The conclusions of the whole Entec study are driven by what may happen in the cement sector. Therefore, cement is the key sector in respect of which a trading system would make sense, according to Entec.

The study concludes that a huge reduction of emissions for the cement sector is potentially achievable and relatively cheap under a trading scheme. However, some of the assumptions by Entec are questionable:

1. Entec has calculated the average emission of a plant by dividing total emissions by the number of installations, thus ignoring CEMBUREAU’s point about considering whether there actually is – or not – a need for additional end-of-pipe abatement at installation level. The result is that more abatement potential for the cement industry was assumed than is actually possible.

   This is even clearer for SO₂. In the cement industry, SO₂ emissions are directly related to the sulphur content of the raw materials, therefore EU-wide emission levels from cement plants are overall low, which means that most of the plants do not need any additional end-of-pipe abatement measures to operate according to BATⁱ.

2. A request for installation specific information was not directly addressed to CEMBUREAU by Entec. This led them to assume that the abatement techniques were installed in plants with the lowest emissions. This is not accurate and does not represent reality.

   Plants with low SO₂ emissions are not necessarily those with abatement measures in place. Those with emissions of 400mg/Nm³ may have applied abatement measures and thus have no further potential to reduce emissions. The only installations with the potential to reduce their emissions are but a few with high SO₂ emissions related to the sulphur content of the raw materials.

   This also applies to NO_x, but to a lesser extent. Some plants have come down to 800mg/Nm³ and have no room for further abatement, whereas others, at 700mg/Nm³, may have.

3. Current cement sector NO_x emissions are around 400kt. With no capacity increase, 2020 BAU emissions for the cement sector would total 281kt. However, BAU emissions for the cement sector are assumed to increase to 500kt even under upper-BAT conditions with the implementation of the Industrial Emissions Directive.

   The equivocal assumptions in the modelling are due to:

• The GVA in 2020 projected through the PRIMES Model has been applied directly to clinker production leading to an estimated huge capacity increase which is unlikely to materialise, and

• The huge capacity increase being built with flame cooling or low-NOxⁱ burners as BAT, and no SNCR, which is the BAT foreseen in the new cement BREFⁱ Document from May 2009.

This point has been acknowledged by DG ENV as crucial to the REFERENCE SCENARIO and Entec has been asked to clarify it. After the meeting, upon a query raised by CEMBUREAU, the European Commission confirmed that “DG ENV has agreed with Entec that they would do some additional sensitivity analysis to assess what would be the impacts of different assumptions concerning the uptake of SNCR under the baseline/reference/trading scenarios. A revised version of the report should be available around the end of March.”

General innacuracies in the Entec study

The report contains some inaccuracies and methodological approximations which raise questions about the robustness of the conclusions presented:

1. The uncertainties in the assumptions are high
   The uncertainties in the assumptions, combining macroeconomic models with microeconomic installation data are higher than the differences between the scenarios presented. This casts a doubt on the approach as such and scenario based policy making in general.

2. The policy baseline is questionable
   The report attempts to second-guess the outcome of two key items of air quality legislation: the Industrial Emissions Directive (IED) and the National Emissions Ceilings (NEC) Directive, neither of which has been finalised.

3. There will be double regulation
   It is acknowledged in the report that air quality limits will need to be respected and, therefore, may be required to impose emission limit values (ELVs). Although the modelling indicates that ELV’s would be lifted, this is not a likely scenario in the Member States.

   There is no assessment of the impact of setting ELVs for NOx and SO2 on top of trading, which is the likely situation. BAT/ELVs and trading do not work together as market liquidity will be very low.

4. Costs are unclear and underestimated
   Apparently the environmental benefits and costs for society have been mixed with the costs for industry, blurring the picture of who bears which costs.

   Secondly, costs are presented in the report as savings compared to a reference scenario. In fact, they remain costs for industry. For companies already applying BAT the system will only bring costs. Only in the situation where the allocation rules would give full free allocation to any installation applying BAT would this be resolved. In any event, administrative costs would come on top of this.

   The total cost of €35 million/year regarding monitoring, reporting and verification would appear to be an underestimation.

   There is no assessment of the indirect costs to energy intensive industries due to the impact of a trading scheme on power prices. These effects need to be assessed at national level. The first study is not clear about whether the indirect costs (excluding the indirect impacts on power prices) will be taken into consideration in the second study.

5. Environmental and health impacts are not properly addressed
   The analysis of environmental impacts could be insufficient as a 10x10 km grid was used and local impacts can only be studied at a 1x1 km grid.

   The report does not address the issue of cross-media effects (page 150). There will be cross media effects if the IPPC/IED is no longer applied to the pollutants.

   An EU-wide trading scheme does not make sense environmentally as it would be equivalent to giving the right to trade health effects across Europe.

   Furthermore, a trading scheme has the potential to increase emissions in centres of population, thereby creating air quality hotspots. The study does not adequately address this issue.

6. The database of industrial installations contains uncertainties
   The distribution of emissions between Member States estimated by IIASA and Entec are clearly different. Therefore, there is a risk that the Entec database is not adequate in terms of its composition of plants per Member State.

   It is questionable whether the database sufficiently represents the actual situation of the plants. If it does not, it is impossible to rely on data regarding emission reductions and related costs, as these two are strictly plant-related.

7. Modelling process contains huge uncertainties

   The basis of the study for 2020 projections is an out-of-date set of energy projections from the PRIMES model which do not adequately account for the effects of the economic crisis. In addition, the expected huge growth in emissions is unlikely as all new investments will be at BAT level.

   The conclusions of the study are based on a very complex modelling process which contains significant uncertainties throughout.

   For example, the BAU scenarios show enormous growth in sector emissions compared to the EPER 2004 data. There is little or no sensitivity analysis of the data used in the scenarios. The study lacks a more careful assessment and quantification of the impact of these uncertainties on the policy-relevant conclusions.

8. Functioning of an “theoretical” trading scheme
   There is no assessment of the liquidity of the market under the different trading scenarios. New installations should, in practice, have little room to trade.

   The perfect market conditions assumed in the report in fact do not exist. This is clearly visible in the EU CO₂ ETSⁱ and it has a significant impact. For instance:

   • The “benefits” of trading immediately vanish if the system moves away from total revenue recycling, which is ignored as a possible outcome of the legislative process.
   • Trading can be seen as fund raising. Only ‘hot spot’ operators will have an interest since they will expect funds from revenues to be given for extra abatement beyond BAT. It is difficult to see the “benefits” of trading for emitters outside ‘hotspots’.
   • Overlap and interference of the trading system with the EU CO₂ ETS have not been fully assessed. CO₂ and NO_x emissions are often coupled, and CO₂ lowering will increase NO_x.
   • The report has not looked at the key drivers of the CO₂ price, e.g. oil price impacts, organisation of auctioning, sector caps, etc. The report assumes that the price will be set by the technical options which cost the least which, in fact, is by no means the case in the EU CO₂ ETS.
   • From an ecosystem and health perspective, sectors/countries where the effects of emissions categorised as “high”, pose the highest risk if emissions are increased. Trading between sectors/countries with “high” and “low” effects would only be beneficial one way, from “high” to “low”, and detrimental if the trade occurred the other way around, from “low” to “high”. Therefore, a rather complex system of trading possibilities between Member States arises when taking all the effects into account.
9. No analysis at Member State and sector level
   There is no analysis of the impact of a trading scheme on costs at either Member State or sector levels. Abatement costs will differ widely between sectors and no information is given on technological options and related costs. There is no assessment on the abatement cost for emissions in Member States in “high” impact zones that would not be allowed to trade in comparison to Member States which would be allowed to trade.

Overall assessment

The objectives of the Entec study are basically assessed against one single parameter: the theoretical cost-advantage of a trading scheme versus an IED approach, thereby concluding that a trading scheme would be substantially cheaper than the implementation of the IED.

However:

• The trading scheme does not start from an IED upper-limit BAT restriction, but rather from a ‘higher’ BAU emissions baseline. Thus, the study assumes non-compliance with the European Union’s most recent IED policy. The main share of the cost-gain of a trading scheme is actually calculated in the first track of a trading scheme, when emissions are reduced down to the level of upper-limit BATs.
• Indirectly, the Entec data suggest that the cost-gains of applying a trading scheme on top of IED upper-limit BAT requirements are fairly low. In other words, most of the cost gain occurs in the first step of a trading scheme in which emissions are reduced from BAU to upper-limit-BAT levels.
• Entec assumes that a fully effective trading scheme would be operational in 2016 while at the same time compliance with IED would no longer be required. This time planning seems to be rather optimistic, also regarding the fact that the IED has recently strengthened the local BAT approach. Introduction of a trading scheme at a later stage would reduce baseline emissions and reduce the cost-gains from a trading scheme.
• The key cost-savings mechanism of the trading scheme scenarios in the Entec study is that expensive SCR measures in the power sector are postponed in favour of cheaper abatement measures in other sectors, which can consequently sell their credits to the power sector. However, SCR in the power sector is a mature technology with related costs written off and not expected to further decrease over time. When the European Commission aims at greater emission reductions in the long run, SCR-measures will, in any case, have to be implemented. As a result, with decreasing caps, the cost-advantage of a trading scheme over IED will disappear.
• The introduction of a trading scheme for NO_x and especially for SO₂ may not be proportional. Acidification related to SO₂ emissions will have become a regional or local problem in 2020, to which industrial SO₂ emissions will contribute only 11%. SO₂ emissions are also strongly associated with CO₂-intensive fuels (coal, oil) and probably, at least in the long-term, climate policies will provide an additional incentive for a reduced use of these fuels.

CONCLUSION

Even the Entec study actually shows that the ‘window of opportunity’ for an trading scheme is quite small. Although this conclusion is somewhat hidden in the report, the large cost-gains seem to rely heavily on the assumption that all IED requirements are removed and upper-limit BATs can be reached via a trading scheme. The cost-advantage of moving beyond upper-limit-BATs via a trading scheme appears to be limited.

In actual fact, the trading scheme is being proposed at a late policy phase in which the environmental problem has already been substantially reduced. Industrial NO_x and SO₂ emissions in the EU, including those from the cement sector, have dropped substantially since the mid 1990s. This has been achieved through the legal enforcement of Emission Limit Values for individual emission sources.

Furthermore, the trading scheme is introduced within a policy framework that all stakeholders agree cannot be simply removed as Entec assumes. Interaction with standing polices will decrease its potential efficiency and increase the complexity of air pollution policies, whereas the Commission aims at simplification.

The proportionality of introducing a trading scheme for NO_x and especially for SO₂ is questionable as it goes in the opposite direction to the EU’s supposed policy making system. From the perspective of the cement sector, these arguments are even stronger because the SO₂ performance of the sector is already good.

The desired air quality can be achieved by the better implementation of existing legislation, which is the motive behind the European Commission ongoing recast of the IPPC and six other directives into the Industrial Emissions Directive.