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News Extra: ETS carbon market system changes deemed insufficient to stop ‘leakage’ by EU chemicals industry

28 August 2015

In the run up to the Paris climate change talks in December, in mid-July the European Commission set out major new proposals to revise the EU Emissions Trading System (ETS) – currently the largest cap-and-trade carbon market in the world. 

Introduced ten years ago, the ETS is Europe's most important tool for climate protection. But with carbon prices too low to reduce emissions, it was in urgent need of an overhaul.

The system imposes CO2 quotas on about 12,000 power plants and factories, forcing those that exceed the caps to buy permits from businesses that emit less. Each permit covers 1 metric tonne of emissions. Under the latest proposals industries would see their CO2 allowances fall by 2.2% a year between 2021 and 2030 compared with a 1.74% annual decline in the 2013-2020 period.

The EU’s target is to reduce CO2 emissions by 40% by 2030. To meet this goal, the European Commission proposals to reform the carbon trading system include fewer free certificates for carbon dioxide emissions and more flexibility in their allocation.

The proposed regulations will also reduce from 180 to about 50 the number of manufacturing industries eligible to receive all of their permit allocation for free rather than through auctions.
The proposals came following fierce lobbying efforts from energy-intensive industries, such as the chemicals, energy, steel and paper sectors, which have consistently warned that companies based in the EU will move elsewhere and potential investors from outside the EU will make their investments in other jurisdictions - so-called ‘leakage’.

This more targeted approach is aimed at safeguarding the international competitiveness of those industry sectors most susceptible to leakage.

The organisation representing one of the biggest affected industries, the European Chemical Industry Council (Cefic), said it was disappointed with the proposals. Cefic represents 29,000 companies that produce around 17% of the world’s chemicals and employ 1.2 million people across the EU.

While insisting it fully supported the fight against climate change and the Commission’s ambition to transform the EU into a competitive low carbon economy, Cefic said the Commission had done little to address the industry’s concerns.

“There’s little fresh thinking”, commented Hubert Mandery, Director General of Cefic. “The Commission proposals shy away from measures that would encourage carbon-efficient companies to invest in Europe. Overall, this makes matters worse for companies wanting to grow in Europe.

“The intention appears to be to enable carbon efficient companies to grow without incurring undue carbon costs. Cefic and the Alliance of Energy-Intensive Industries have been calling for such a system. However, our initial reading is that the proposals do not go far enough.

“Overall, the Commission’s proposals fall short of producing the necessary incentives to invest and grow in Europe. On the contrary, even Europe’s most carbon-efficient companies would face significant carbon costs in the years to come. The proposals would reduce carbon and investment leakage-prevention measures by arbitrarily reducing the number of sectors eligible and the level of coverage for those still eligible. This will continue to seriously undermine the competitiveness of energy-intensive industries in the near future.

“Energy intensive industries compete on price in global commodity markets. Unlike the power sector, energy-intensive industries cannot pass through their carbon costs to consumers without losing market share to their non-EU competitors. Higher carbon costs inevitably erode margins and hinder the industry ability to provide a sufficient return on investments in the long term,” Mandery concluded.

The legislative proposal has now been submitted to the European Parliament and to the Council for adoption as well as to the Economic and Social Committee and the Committee of the Regions for opinion. The Commission said it will work with these institutions to see the legislation through.

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