Low carbon price could see sectors bumped off free allowances list
Correction: Please note that in the ICIS story headlined “Low carbon price could see sectors bumped off free allowances list”, dated 25 April 2012, a date in the third paragraph was incorrect, as was the definition of carbon leakage in paragraph six. A corrected story follows:
The European Commission could reduce the number of installations eligible for free allowances between 2013 and 2020 if carbon prices remain low, it has confirmed.
Severely depressed carbon prices in the EU emission trading system (ETS) mean the list of sectors previously judged to be at risk of "carbon leakage" could be revised early in phase III.
The Commission set the rules in 2009, but could amend them early in the next phase to reflect a reduced costs and competitiveness imposed by the ETS due to the falling price.
This would force industry players to buy more carbon allowances at auctions or on the secondary market.
When the impact assessment for the EU's carbon leakage rules was carried out three years ago, it was on the basis of a carbon price of €30/tonne of CO2 equivalent (tCO2e) - over four times the benchmark contract's current price of €7.15/tCO2e and far above analysts' forecasts for average phase III prices.
At-risk sectors
Carbon leakage would occur if greenhouse gas emissions from any given sector were to increase in regions outside the EU as a result of the EU’s rules.
The most straightforward way this could happen is if a company relocated from Europe to a region that lacks a regime to regulate emissions, to avoid the cost of complying with the ETS.
The Commission has deemed 166 industries to be at risk of carbon leakage, including the big surplus allowance holders in the EU ETS, steel and cement. Other sectors on the extensive at-risk list include the producers of everything from cast iron to crocheted hosiery, from pesticides and pharmaceuticals to tomato puree, as well as ships, musical instruments, bicycles and bakers' yeast.
The Commission decision does omits specifics of which, if any, of Europe's industries were found to be at a falling risk of carbon leakage.
Under the terms of the directive, the Commission must carry out a review of this list by 31 December 2014. The review will take account of the extent to which it is possible for industry to pass on both the direct cost of carbon allowances and the indirect cost of higher energy prices during phase III.
The EU rules have barred energy companies from receiving free allowances in phase III, apart from in a handful of select member states that are eligible to be exempt from auctioning under a derogation. Bulgaria, Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland and Romania were all eligible to apply for the derogation.
EU law requires countries that have opted out of full power sector auctioning to spend the estimated market worth of the free EUAs on energy efficiency programmes.
Energy industry players in all other member states, however, will pass the cost of purchasing 100% of their carbon allowance needs to customers. For energy-intensive industries like steel, this, rather than their own carbon allowance purchases, is the biggest concern heading into phase III (see EDCM 20 April 2012).
But if carbon prices remain low, even this indirect cost from the ETS may prove limited on industry, weakening their claims to be vulnerable to carbon leakage. VF
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