The Implementation of the ETS directive is threatening the existence of the steel industry in Europe
The revised ETS directive provides explicitly for 100 % free allocation of allowances for the most efficient installations of sectors at risk of carbon leakage. The steel industry is one of the sectors most exposed to carbon leakage. Yet, the current implementation methodologies being discussed by the European Commission go directly contrary to the expressed will of the Member States that the competitivity of European industries such as ours should be protected. Instead of applying a balanced approach the Commission is interpreting provisions of the ETS directive to reduce access to free allowances for our industry. This is against both the spirit and the letter of the directive.
Our concerns are focussed on the following:
- Waste gases: The benchmark methodology which is currently discussed by the Commission only partially takes waste gas-related CO2 emissions into account and thereby artificially reduces the amount of free allowances for the steel sector by 15 % to 20 %. This is completely contrary to the text of the directive which states: “No free allocation shall be made in respect of any electricity production, except for ... electricity produced from waste gases”. About 80 % of CO2 emissions related to steelmaking are originating from waste gases whose recovery massively contributes to the reduction of the use of primary energy sources, therefore waste gas based electricity generation has been explicitly exempted from auctioning in the directive. The steel industry needs as part of its 100 % free allocation inclusion into its benchmarks of the full CO2 allowance related to waste gases generated by the most efficient installations. This is a vital requirement for the steel industry and has been expressly recognised as such in the directive. Failure by the Commission to respect this legal right will inevitably lead to migration of steel production outside the Community.
- Linear reduction factor: the directive already sets very ambitious targets for the industry, targets which may already lead to some degree of leakage:
- Benchmarks are set at the average of the 10 % best performing installations. Therefore, possibly only 5 out of 100 installations of sectors at risk of carbon leakage will receive 100 % of their needs in free allowances;
- In addition, a “correction factor” may be applied on every installation if the aggregated benchmarks for all industries do not comply with the 21 % overall reduction target for the manufacturing sector. This may lead to carbon leakage of even the most efficient installations.
- However, now on top of all this the Commission is attempting to reduce free allocation even further by suggesting for all installations a linear factor of minus 1.74 %, every year, starting in 2010 or 2011 and leading to an overall further cut of ca. 11 to 13 % of free allowances over the period. This is in complete contradiction with the purpose of the benchmark approach, will directly provoke carbon leakage and is therefore completely unacceptable.
The combined effects of the two points above (waste gases and linear reduction factor) will be a further reduction of free allowances of between 26 and 33 % on top of the shortfall that is likely to result from the application of benchmarks. The total shortfall therefore for the steel sector as a whole could be possibly between 40-50 %.
- Compensation: in addition to the above points, the ETS directive provides for compensation eligibility for leakage sectors for the costs associated with electricity price rises. We strongly urge the Commission not to limit this compensation to a restricted list of sectors. This would be unlawful and unacceptable.
The net result of all these initiatives by the Commission will be a huge shortfall of free allowances for the steel industry, rather than the 100 % free allowances subject to benchmarks which is foreseen in the Directive for sectors subject to carbon leakage.
The European steel industry therefore urges the European institutions and the Member States to ensure a balanced and legitimate implementation of the ETS directive with truly 100 % free allowances for the needs of the best performers until an International Agreement provides a level playing field within sectors producing globally traded goods.