Commission to slash free EUAs requests – analysts

The European Commission will have to cut the number of free EU allowances (EUAs) against what countries have requested for their industrials in phase III of the EU emissions trading system (ETS), to respect the set emissions cap, analysts say.

ETS installations and carbon traders wait for the commission’s final free allocation numbers, after EU countries asked for specific amounts of free EUAs in their National Implementation Measures (NIMs). The confirmed NIMs, already months overdue, are now expected to be published only after this month at the earliest (see EDCM 8 July 2013).

Analysts say the commission is likely to apply a cross-sectoral correction factor to the submitted NIMs, as the sum of free allocation proposed by countries has exceeded the number of free EUAs available under the EU ETS cap.

Dutch consultancy Ecofys said Thursday that it expects the reduction factor to be 0.85, basing its estimate on an analysis of 17 of the 28 NIMs.

“This would mean that in 2013 industry receives about 15% fewer allowances than expected, which represents a value in the order of magnitude of €300m at today’s market price,” Ecofys said.

If that 15% figure proves correct, it would hit some sectors hard, according to Matteo Mazzoni, a carbon analyst with Italian consultancy Nomisma, on Friday.

But Germany-based Tschach Solutions, recently acquired by ICIS, estimated a lower correction factor from a greater evidence base. “Based on the analysis that we carried out on 26 NIMs, we expected the cross-sector correction factor to be between 0.95 and 0.99,” said Ingo Tschach, head of market analysis. This would translate into only 1-5% fewer allowances.

Blast furnaces

Tschach added that its estimate may change when accounting for another key issue: emissions from waste gas combustion.

In May the commission said it did not intend to apply a correction to submitted NIMs but that details still need to be clarified (see EDCM 30 May 2013). One of those details, the commission said, relates to blast furnaces. Steel plants emit waste gases in the production process that often can be used to generate electricity in gas-fired plants nearby.

“Those emissions were considered emissions from the power sector in phase I and II, and therefore they might not be included in the formula used for calculating the total volume available for free allocation entitlement for industry in phase III,” said Tschach. He added that this could pose a problem if the steel sector also has requested free allocation for phase III to cover those same emissions.

According to Ecofys, a similar situation applies to heat and power installations in the paper industry.

The Dutch consultancy also identified the choice of the base year – which resulted in high activity estimates as a basis for the allocation calculation – as another factor that may have pushed the requested free EUA volume above the cap. Silvia Molteni