EPCA ’19: INSIGHT: Europe petchems – prepare for more Reach-like regulation, higher costs

LONDON (ICIS)–Major societal shifts regarding the environment will continue to put European petrochemicals under the pressure of more costs and stricter regulation, a former World Trade Organization (WTO) director-general said this week.

Pascal Lamy, WTO chief between 2005 and 2013, argued that given carbon dioxide (CO2) emissions need to be drastically reduced in the coming decades, carbon pricing will become a key tool for countries to encourage their industries to become greener.

The shift to greener raw materials is not expected anytime soon within the petrochemical industry, and it will be the use of fossil fuels what will make the sector vulnerable to public rage about climate change.

Carbon pricing  is “the silver bullet” the world’s governing authorities will use to address climate change, Lamy said.

Lamy was also the EU’s Commissioner for Trade between 1999 and 2004. He is now the president of the Paris Peace Forum.

He was speaking to delegates at the closing session of the European Petrochemical Association (EPCA) annual meeting.

In a speech encompassing the US-China trade war and Brexit, Lamy gave a personal view of current global woes. Now, he “doesn’t report to anyone” and that allows him the freedom the high positions he held in the past deprived him of.

”There is a political wave coming,” it encompasses ecology, climate change, biodiversity degradation, or ocean pollution. “And in your sector [petrochemicals] immediately everyone thinks now about plastics,” Lamy said.

“Others are less visible, but also important. Precaution: carbon pricing will be the silver bullet to global markets to address climate change, and it will take several forms – trading systems, taxation, regulation. The carbon pricing toolbox will not be only about price.”

Lamy said that the EU will try to be at the forefront of climate change-related regulation. In his view, as the US and China become strategic antagonists, the EU may even succeed in bringing China into its regulatory realm.

EXPECT MORE REACH-LIKE REGULATION
Being a chemicals producer in Europe changed radically after 2007, when the regulatory framework Reach was ruled out.

Welcomed with a lot of scepticism – or even resentment – Reach has already gone through its third, last phase, although not without recurrent calls from the EU’s chemicals regulator the European Chemical Agency (ECHA) regarding the mediocrity of dossiers, which are too often filed incomplete.

Lamy was blunt: “Expect more Reach-like regulation,” he told EPCA delegates, because the regulatory pressure will continue increasing for an industry like petrochemicals.

Within the Reach-like regulation to come would be carbon pricing, and the petrochemical industry will increasingly be covered by the EU’s Emissions Trading Scheme (ETS), although a positive may come from higher, free, carbon trading allowances for the sector.

The EU’s ETS works on the ‘cap and trade’ principle: a cap is set on the total amount of certain greenhouse gases (GHG) that can be emitted by industrial installations covered by the system.

The cap is reduced over time so that total emissions fall. Within the cap, companies receive or buy emission allowances which they can trade with one another as needed.

Finally, a radical “shift in the EU’s governance system” will mean that regulation tackling climate change will take centre stage and be structural and systemic. Petrochemical producers and consumers should expect their competitiveness to be affected due by this shift.

A positive, however, will be the vast amounts of public money made available for research and development (R&D). The petrochemical industry should “organise, get involved” in the way the next EU multiannual financial framework (MFF), or budget, for the 2020-2027 period is outlined.

With more R&D money available, petrochemicals may find a helping hand to create the necessary materials for a circular economy – the materials which ultimately would allow the industry to survive.

CHINA ALIGNING WITH THE WEST: ‘THAT IS OVER’
Lamy said the last 12 months of US-China trade conflict may have changed the way US and China view each other and deal with each other for decades to come.

While he believed the rise of populism in the west may be contained from now on – as the west addresses the “pains of globalisation” – the formerly expected alignment of China with the west rules and values is now truly over.

“Be it because of its political system, or the way it runs its economy, or because of its civilisation and how Chinese people think about the world, the expectation that China would converge with the rest of the world is now truly over,” said Lamy.

“Within the US political and economic establishment, the view now is that China has become a threat for the US. Equally, there was always a minority in the Chinese [Communist Party’s] politburo that the US was not reliable and would cheat China at some point. They have become a majority now.”

This led Lamy to wonder if the world is set on course for  “serious deglobalisation”, representing a disconnection of the production systems created in the past 30 years.

“Globalisation has been extremely efficient and extremely painful – one of the reasons for the rise of populism,” Lamy said. The EU can benefit, however, if it succeeds in helping reform the WTO following the damaging US-China trade conflict.

BREXIT: EXPECT ZERO TARIFFS LONG-TERM
While Lamy said that the greatest threat to stability was the unknown Brexit conclusion, he told petrochemicals players to expect, in the medium to long term, zero tariffs in trade between the UK and the EU once the country leaves the club.

Equally, and unless the UK decides to go it solo and align with the US, regulatory convergence will also prevail.

Brexit would only be Brexit in name, he said.

“Tariffs are not a problem. [UK Prime Minister] Boris Johnson is some sort of clever Trump: he won’t impose tariffs. What could be a problem is, of course, regulatory divergence, but my view is that it will not happen,” said Lamy.

“Brexit will only be in name, because of the high cost of a true exit. 65m consumers [the UK population] with a specific regulation next to the EU Single Market is unlikely. The odds that regulatory divergence will happen in petrochemicals are very low. On this one, expect the playing field to remain levelled.”

The EPCA annual meeting ran in Berlin on 6-9 October.

Picture source: Romuald Meigneux/SIPA/Shutterstock

By Jonathan Lopez