INSIGHT: EU industry must still fear ‘carbon leakage’

25 September 2009 18:02  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--The European chemical industry looks to be well on the road towards obtaining exemptions from the compulsory purchase of carbon credits when the next phase of the EU’s Emissions Trading Scheme (ETS) comes into force.

But the exemptions are likely to be based on a benchmarking system that would effectively reward the most carbon efficient and tax those who are not.

The industry has talked long and hard trying to persuade the European Commission that the sector should be exempt from this onerous part of the next phase of the ETS.

Industry executives in Brussels this week were feeling positive that the case for exemptions for vulnerable parts of the industry – the big energy use segments such as petrochemicals, polymers and chlor-alkali – had been accepted.

The Commission said on 18 September that the 164 EU industrial sub-sectors would be exempted from the eventual compulsory purchase of carbon credits. These are the credits currently allocated to EU member states for distribution to affected industries that can be traded for CO2 emissions under the ETS scheme. A number of these are in the chemical industry.

The allocation methods will change in the third phase of the ETS, which runs from 2013.

The chemical industry has been fighting hard for recognition as an energy-intensive sector and one which warrants continued free carbon credit allocations.

European industry is clearly worried about “carbon leakage” – the transfer of manufacturing and other facilities to parts of the world with less onerous carbon control rules and mechanisms.

The third phase ETS revision proposals, first outlined in January 2008, caused great concern and seemed to be designed to punish the most efficient carbon dioxide (CO2) producers as well as the most intensive users of energy.

The allocation of carbon credits in the third phase of the ETS will be based on a series of benchmarks created for each industrial sub-sector.

The best 10% will receive free carbon credit allocations, but others will not. The idea is to provide an impetus for those higher on the curve to invest more in CO2 abatement technologies.

Europe’s chemicals sector was “not dissatisfied” with the Commission’s latest plans for the working of the ETS, according to Joe Kruger, the executive director for energy and logistics at European trade association Cefic.

Most of the arguments put forward by Europe’s chemicals makers had been accepted. All relevant industrial subs-sectors had been included in the Commission’s communiqué. These include plastics, industrial gases, fertilizers and synthetic rubber.

Cefic recognises, however, that the devil will be in the detail of the final ETS revisions.

Carbon costs have been calculated assuming only 75% auctioning by industrial sub-sectors. The chemical industry argues that chemical companies, with long-lived manufacturing plants will, at some stage, have to move to 100% auctioning.

“When all regions do the same as us, it's fine,” said Kruger. “It’s not acceptable that [the European Commission] changed the calculation methodology at the last minute.”

Further changes to the ETS third stage are also possible following the Copenhagen climate summit in December, so chemical producers are not out of the woods yet.

The European Commission hopes its proposal will be accepted by EU ministers in December. Changes to the exemptions could be made following the Copenhagen summit.

As 2013 approaches, the tenor of the debate on carbon leakage rises.

A good argument can be made for the potential for carbon leakage across the chemicals sector.

France and Germany argued this week at the UN General Assembly that countries which have moved more strongly to cut carbon emissions, or taken on tougher targets, should be able to protect their industries.

The European chemical industry, meanwhile, has developed benchmark curves for seven processes accounting for more than 80% of the sector’s CO2 emissions. Unfortunately, this is by no means an international effort as yet. Talks are ongoing to develop a more globally representative set of data.

Few in the industry can deny that, at some stage, their operations will be required to meet tougher CO2 emission regulations.

But producers in Europe rightly worry that their plants might yet be sacrificed to help achieve the EU’s climate change goals.

Bookmark Doris de Guzman’s Green Chemicals Blog for views on sustainability issues
To discuss issues facing the chemical industry go to ICIS connect

By: Nigel Davis
+44 20 8652 3214

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