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Countries may fund low-carbon technology, but oversupply needs tackling

12 Jun 2013 18:46:22 | edcm

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European countries could use revenue from EU allowance (EUA) auctions to finance low-carbon research and innovation projects for energy-intensive industry, the European Commission said in a proposal late on Tuesday, but a non-governmental organisation (NGO) study has warned that action is needed to make viable long-term investments to cut CO2.

The proposal was included in an "action plan" to help Europe's steel industry retain long-term competitiveness, as the sector faces low demand - currently 27% below pre-crisis 2008 levels - and overcapacity.

"One option for innovative financing would be the use of some of the revenues from the auctioning of emissions allowances under the [EU Emissions Trading System, or EU ETS] to help finance climate-related objectives, possibly including the development of new low-carbon technologies across the industries concerned," the plan says.

The share of allowances auctioned out of the total pool issued is currently 40% for 2013. But it is due to increase in a linear manner across phase III to reach 100% by 2027.

The plan often refers to the steel sector as being at carbon leakage risk because of its high carbon intensity.

Carbon leakage occurs when industry outsources production to low-carbon-price regions, for instance, outside the EU. But in phase II of the EU ETS, free EU allowance (EUA) overallocation and cheap offset prices drove the cost of inclusion down to 2% of steel companies' total expenditure, EU officials previously estimated (see EDCM 24 May 2013).

The EU is revising its criteria for classifying and listing companies that are at risk of carbon leakage, which could lead to fewer free EUAs being handed out in the future (see EDCM 11 June 2013).

A new NER300?

The steel industry will struggle to achieve further significant CO2 emission reductions without introducing "breakthrough" technologies, as the most modern installations in the EU are "close to the limits" of what current technologies can do, the plan says.

"Looking at the future, it is clear, however, that an industrial-scale demonstration project of producing steel with carbon capture and storage (CCS) will be required, and the likely financial envelope will fall beyond the typical size of a R&D&I [research, development and innovation] project," the European Commission said, estimating the costs of the full spectrum of demonstration experiments to exceed €500m.

Therefore, financing instruments, such as an NER300, would be needed for the next phase of commercial demonstration of CCS technologies for steel production.

Under the NER300, selected CCS and renewable energy electricity projects are financed via the sale of EUAs from the EU's new entrants reserve (NER).

The bloc executives previously labelled "interesting" the idea of creating a similar mechanism for other industry sectors (see 30 EDCM May 2013).

Price crash

But companies found themselves more dependent on direct government funding for their CCS projects, as money originally earmarked through the EU's NER300 fund has fallen short of the sums needed for significant CCS investments because of the low carbon price and the cost of the technology (see EDCM 30 October 2012).

Also, the additional supply of allowances the NER300 offered to the carbon market added to the oversupply that had driven these prices down.

This suggests that the carbon price would have to recover to effectively fund clean technology for the steel sector. Curbing the oversupply would help to prop up the price.

On Wednesday, NGO Greenpeace and consultancy Ecofys put out a research paper looking at a number of options to tackle the oversupply - including the possibility of altering the existing linear reduction factor.

The study warns that unless the surplus is addressed, in the long term, the EU ETS will fail to offer incentives to reduce emissions - as will clean technology in the steel sector.

Unless action is taken, "mitigation measures will be delayed, risking a costly lock-in of high-carbon technologies" after 2020, the study concluded. Silvia Molteni and Marie-Louise du Bois

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