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Chemical industry wants carbon allowance allocation based on real production

24 Apr 2013 19:29:25 | edcm

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Europe's chemical sector this week threw its weight behind allocating free EU carbon allowances (EUAs) after 2020 based on actual rather than historical production levels.

According to industry association CEFIC, that would enable correction of too large an allocation in case of economic recession and would ensure that chemical plants are given access to more emissions allowances in times of growth.

The fact that CEFIC wants changes to take place only after phase III of the emissions trading system (ETS) ends in 2020 contrasts with the system's current revamp under consideration by the European Commission, which aims to curb continuing oversupply.

Introducing ex-post benchmarks would mean that emissions allowance supply would rise and fall in line with industrial production in the EU, as opposed to the idea of capping emissions in advance that is the basis of the current ETS.

The commission has set out to tackle the continuing over-allocation of allowances, outlining six options for reform.

The idea of a more flexible and dynamic cap has already found several supporters among ETS participants such as Italian electricity incumbent Enel, steel major Tata Steel and cement producer Holcim (see EDCM 8 March 2013).

However, the commission did not include such a mechanism in its six options to structurally reform the ETS. Its most similar is the introduction of a price-management reserve mechanism that adjusts supply in case of a large temporary supply-demand imbalance.

In case low demand generates an excessive price decrease, allowances from the auction pot could be deposited in a reserve. In the opposite case, they could be gradually released, the commission said.

Permit surrender

From this year, chemical producers must surrender permits for CO2 emitted during their production of ammonia and petrochemicals, as well as for their N2O emissions from the production of nitric, adipic and glyocalic acids (see EDCM 10 September 2012). Many, however, are already active in the carbon market as they produce their own energy.

CEFIC said CO2 emissions from combustion in the chemical industry are estimated to have been 132m tonnes in 2010, while process emissions amounted to 43m tonnes.

Free EUA allocation based on pre-recession emissions is a key reason for the oversupply in the cap-and-trade scheme, which the EU now estimates might already have ballooned to 2bn EUAs. Industrials received a number of free EUAs worth much more than their actual carbon emissions, which have declined as production has slumped. Silvia Molteni

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