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UK industrials to receive CO2 compensation despite surplus

20 May 2013 19:08:49 | edcm

The UK will compensate the most electricity-intensive industrials for indirect costs arising from climate policies regardless whether they have an EU allowance (EUA) surplus, the country's government said on Monday.

The government has earmarked £250m (€295m) until a spending review in April 2015 to help energy-intensive sectors such as iron, steel, chemicals and cement offset increases in electricity prices from the carbon floor price and the EU Emissions Trading System (ETS) - £100m for the first and £110m for the latter (see EDCM 29 November 2011).

Following a public consultation on the issue, the UK government on Monday rejected some respondents' suggestion that the cost calculation should take into account companies EUA over-allocation.

"There was a request that government should assess the costs and benefits of the whole of the EU emissions trading system [ETS] scheme (i.e. indirect and direct effects) and should not compensate firms for the indirect costs of EU ETS if they have received major benefits from another part of it," a document published and responding to the consultation said.

EU data shows that the most energy-intensive users are also the same sectors that have built up a large surplus of freely allocated EUAs in phase II of the EU ETS, which they can sell back to the market to boost their books.

But the UK said that the question of national and regional carbon costs and compensations are "separate and different" and that the European Commission is best placed to address over-allocation through the EU ETS itself.

The decision means government has also chosen to ignore not only the voice of some consultation stakeholders but also the advice of its independent advisory body, parliament's environmental audit committee (see EDCM 4 January 2013). On the other hand, the government also dismissed concerns of other stakeholders that the £250m earmarked for the compensations would be insufficient.

"All funding decisions beyond the life of the scheme are for future government spending discussions and will be considered at that time," the government said. It also added that variations within the two budgets might be considered.

The EU ETS compensation package, based on EU guidelines, will start to be implemented in 2013, subject to state aid clearance. Compensation for indirect carbon floor price costs is subject to Commission approval for state aid clearance.

The consultation received 58 responses - 34 from industrial and energy companies, including BASF, SSE, CEMEX UK, EDF Energy and RWE npower; 20 from trade associations such as British Ceramic Confederation and Confederation of Paper Industries; and 4 from non-governmental organisations (NGOs) including Sandbag.

Emissions factor hiked

The government also hiked the emissions factor used to calculate the compensations for the period 2013-2015.

The figure will rise to 0.58tCO2/MWh - the maximum allowed by the European Commission - from 0.411tCO2/MWh.

The government initially proposed an emissions factor based on gas-generation as the marginal producer of electricity - i.e. generation that is switched on and off to cover demand fluctuations.

But 31 out of 40 respondents disagreed with this choice, saying marginal power production is often generated from technologies that have a much higher carbon intensity, such as coal.

This resulted in "practical difficulties" for establishing an appropriate marginal emissions factor, given technology variations that set different prices over time.

The choice to hike the factor also aims to minimise industry's administrative burden, the UK government said.

The notion that carbon costs harm competitiveness is often cited by industry opposing climate policies such as the EU ETS.

On Friday, at the Agency for the Cooperation of Energy Regulators (ACER)'s annual conference, EU commissioner for energy Günther Oettinger said that EU energy policy should shape post-2020 carbon-reduction targets accordingly.

"A simple repetition of the 2020 targets, maybe 30/30/30, sounds good, but is not a solution," he said. Silvia Molteni and Matilde Mereghetti

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