The ETS revision and the increasing pace of emission reduction

Main conclusions:

  • Support was expressed for the ETS in general, with the power sector particularly indicating support for the Market Stability Reserve (MSR) and the increase of the annual emission reduction rate (the so-called linear reduction factor) from 1.74% to 2.2%. At the same time, many industry stakeholders expressed concerns regarding the impact of the ETS on their competitiveness and, in this context, some of them welcome the continuation of free allocation and carbon leakage measures beyond 2020.[1]
  • The competitiveness concerns range from issues of a more general nature (e.g. need for predictability, industrial sectors are approaching limits to reduce emissions with existing technologies, overlapping or interlinked national/EU policies, lack of comparable measures/systems in third countries), to more sector-specific ones (e.g. high share of electricity costs in total production costs in the case of the non-ferrous metals sector, need to ensure sufficient allowances are auctioned in the case of the power sector).
  • Concerning the Innovation Fund, several industry stakeholders welcome the broadening of the scope to include industry and some also welcome that part of the funds might be provided before 2020, and support the higher funding rates proposed. Moreover, several industry stakeholders call for carbon capture and use (CCU) to also be eligible.[2]

 

Industry’s needs

Overall it is fair to say that the industry has serious concerns about the revision and the proposed changes.

1.            It will be important to have free allowances in the future in order to secure future growth of      new and most efficient installations, and to avoid the application of the cross-sectoral                 correction factor;

2.            Allocation of allowances should be driven by realistic industrial activity levels to support                economic growth and to prevent under or over allocation;

3.            Realistic benchmarks would be crucial and the level of ambition for emission reductions                should be in line with technological progress to ensure European industry’s competitive                 edge;

4.            It will be important to getting the carbon leakage list right allowing for the future              development of industry in Europe.

5.            Harmonising compensation for indirect costs is the only way to avoid intra-EU distortions on       the Single Market;

6.            Making the innovation fund fit-for-purpose by improving the eligibility criteria and removing      the financial risk for companies wishing to invest in innovation projects and focusing on the                 ETS sectors.

 

The EU’s Carbon Leakage List

Sectors that are at risk relocating their investments or closing in light of the increasing energy costs in the EU because of the pass-on costs for CO2 allowances from energy suppliers are currently on the so-called Carbon Leakage List and are concerned that the proposed revision of the Directive will threaten their status and thus their competitiveness.

Many sectors therefore have embarked on new assessments of their trade and CO2 intensity in order to prove that they are really under threat from international competition that does not have to comply with such stringent regulations and does not have comparable incurred costs due to climate change policies.

On 15 July, 2015, the European Commission published its proposed changes to Phase 4 of the EU ETS, which will run from 2021–2030. This includes changing the criteria to assess the risk of CL to a quantitative criterion which is based on trade and emissions intensity (for further details on this criterion, refer to Annex 3):

•             Trade intensity is a proxy for the ability of a sector’s ability to pass on a cost increase to                 consumers without losing significant market share. For sectors where there is little trade,    business covered by carbon pricing do not compete with business that are not affected by   carbon pricing, meaning that the risk of CL is small.

•             Emissions intensity is a measure for the cost increase that can be attributed to carbon   pricing, including direct and indirect emission costs.

Industries which meet this criterion will be placed on the so-called “CL list”. This proposal does not include any changes to the current support system for indirect carbon costs.

 

 

[1]  COMMISSION STAFF WORKING DOCUMENT STAKEHOLDER FEEDBACK on the Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directive 2003/87/EC to enhance cost-effective emission reductions and low-carbon investments {COM(2015)337 final}, Page 2

[2] COMMISSION STAFF WORKING DOCUMENT STAKEHOLDER FEEDBACK on the Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directive 2003/87/EC to enhance cost-effective emission reductions and low-carbon investments {COM(2015)337 final}, Page 3