Stricter EU emissions trading system risks denting chemicals global competitiveness – trade groups

MADRID (ICIS)–Six energy-intensive industrial sectors in Spain, including petrochemicals, have called for  “supportive” reform of the Emissions Trading System (ETS) as EU institutions prepare to vote on its reform, the Spanish chemicals trade group FEIQUE said on Wednesday.

Members of the European Parliament (MEPs) are to vote on Wednesday proposals for the reform of the ETS and the introduction of a carbon border mechanism adjustment (CBAM), both aimed at pricing carbon emissions.

Energy-intensive sectors could potentially see their carbon costs spike, something the petrochemicals industry is wary of as it could lower its global competitiveness.

The reform is part of the push to decarbonise the EU’s economy by 2050 under the umbrella of the European Green Deal; initial proposals for decarbonisation contemplate a reduction in carbon emissions by 55% by 2030. These measures are included in the Fit-for-55 package.

In Spain, the fourth largest economy within the 27-country EU*, FEIQUE and the trade groups representing industrial sectors such as refining (AOP), paper (ASPAPEL), food and beverages (FIAB), cement (OFICEMEN), and steel (UNESID) said on Wednesday the ETS and CBA reform should be wary of six redlines for their industries to keep competitive.

“According to data from the EU Transaction Registry (EUTL), between 2012 and 2021 16% of European industrial facilities subject to the ETS have been forced to close,” said FEIQUE joint release.

“It is essential that … the ETS and CBAM support investments by companies, with effective measures against carbon leakage, avoiding disproportionate costs, capacity closures and job losses, due to international competition from companies from countries not subject to comparable carbon costs, or even no costs at all.”

European energy-intensive industries refer to ‘carbon leakage’ when companies delocalise their manufacturing operations to other jurisdictions with less stringent climate policies.

SIX PLEAS
The chemicals trade group said in a joint release with the other five trade groups that the ETS and CBAM reform should:

1 – Have “realistic” carbon dioxide (CO2) emission benchmarks. The trade groups said current benchmarks are “already very strict” and any updated benchmark should consider the availability of related technologies, resources, and infrastructures.

“Abrupt reductions of the reference values ​​in 2026 should be avoided, considering that alternative technologies, energy sources, and raw materials are still very limited,” they said.

2 – Have sufficient levels of free allocation of CO2 rights because industry “needs legal security” to make progress on high capital expenditure (capex) needed to decarbonise.

“The Cross Sectoral Correction Factor should be avoided, as it reduces the free allocation below the benchmark. This can be achieved by increasing the 3% flexibility between auction and free allocation shares and by using the allowances from the Market Stability Reserve (MSR),” they said.

“Likewise, it must be guaranteed that all EU exports have free emission rights, at the efficiency levels of the ‘benchmark’.”

3 – Must guarantee competitive equality at the international level through adequate co-ordination and “complementarity” between ETS and CBAM.

“The price of carbon has increased by more than 700% in just four years. When the CBAM is introduced, it should include a solution for exports and co-exist with the current system of free allocation of CO2 right based on benchmarks until 2030 to test its effectiveness, focus companies’ financial resources on low-carbon investments and avoid market disruptions in value chains.”

The trade groups welcome the European Commission’s proposals for the CBAM to be paid by importers, considering the free allocation of CO2 right granted to EU industry, “thus avoiding any potential risk” of double protection.

4 – The trade groups said that no new conditions should be introduced, because benchmarks already “offer a bonus/malus system” since the free allocation of CO2 rights is granted only to the top 10% level.

“The free assignment must remain conditional on the sole criterion of exposure to risks of carbon leakage. The additional cross compliance criteria create an administrative and financial burden that could result in the very carbon leakage that the free allocation was intended to prevent,” they said.

5 – Complement the current protection criteria on indirect costs to all the sectors included in the CBAM. According to the trade groups, direct and indirect electrification are key for decarbonisation, but high electricity prices “are a major barrier” to such a process.

“Currently, carbon leakage protection for electricity consumption is insufficient and fragmented across EU member states. Therefore, it is essential to maintain compensation for indirect carbon costs and to incorporate compensation mechanisms for all CBAM sectors, to ensure effective protection in all EU member states,” they said.

6 – Avoid disproportionate costs of the MSR and rebalancing. The trade groups said the ETS will be defined by the “stricter cap for 2030 through a higher linear” reduction factor.

“Additional measures such as one-off emission rights cancellation (rescaling) and stricter MSR rules should be avoided, as they create an artificial shortage in the CO2 market and further increase the carbon price, while businesses and homes are struggling with skyrocketing energy costs,” they said.

‘LET US FIX IT’
At the opening of the debate in the European Parliament on Tuesday, the Commission – the EU’s executive body proposing the reforms – said to MEPs it was in their hands to start fixing the “biggest challenge” humanity has ever faced, in the words of the Commission’s tzar for climate action, Frans Timmermans.

“The good news is we can still fix it. If we act now. If you vote tomorrow [Wednesday] to let us fix it. The rest of the world is already following us … The Chinese are copying our ETS system. The Americans [US] are very interested in what we are doing on CBAM and looking whether they could have the same system,” said Timmermans.

“The circular economy that we are creating is copied everywhere in the world …Parts of industry will say ‘this is the end of industry’, ‘this is the end of employment’, ‘so many million jobs will disappear’,” he said.

“The reality is that every time Europe ups the ante, our economy grows, our employment grows, and the rest of the world follows our lead. Let it be the same here again.”

The full version of Timmermans’ opening remarks can be read here.

The vote in the European Parliament in Strasbourg, France, is due to end at 14:30 CEST (local time); a full list of items to be debated and voted can be read here. The voting will be streamed live here and published here.

*The EU is formed by (in bold countries also members of the currency union eurozone): Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, and Sweden.

Front page picture source: World Bank 

Focus article by Jonathan Lopez