Climate Change: EUROFER statement on Waste Gases, technical-long-version

EUROFER explanatory paper – Critique of the Ecofys/Fraunhofer benchmarking system

1. Background

According to the EU ETS Directive 2003/87/EC (revised 2009/29/EC), installations in a sector or sub-sector which are exposed to a significant risk of carbon leakage shall be allocated 100% free allowances under the cap. On the basis of the assessment carried out by the European Commission, the steel sector has been deemed as exposed to a significant risk of carbon leakage (see carbon leakage list approved by the Climate Change Committee on September 18th).

The EU ETS Directive prescribes that this amount of free allowances shall be allocated on the basis of EU-wide product-based ex-ante benchmarks.

Over the last months, EUROFER developed a benchmark approach based on the full CO2-related emissions of five reference products: sinter, coke, hot metal, carbon steel and high alloy steel. This approach addresses directly the CO2 mitigation objectives of the Directive by assigning the full burden of the CO2-related emissions to the benchmark giving rise to it. The system also fosters carbon emissions control at the source and waste gases recovery, indifferently through heat or electricity production.

In parallel a consortium of consultants (Ecofys/Fraunhofer Institut/Öko Institut) appointed by the Commission developed a proposal for free allocation rules for the manufacturing industry. The consortium had already developed in its 2008 report a benchmarking concept based on an energy approach for the BF-route process (sintering, coke making and BF steel making). EUROFER, via several meetings, data and information exchange, pointed out to the consortium that the waste gases, because they are borne to the metallurgical process, cannot be treated as commercial fuels. Waste gases are process emissions and hence, for CO2 emissions mitigation purposes, a CO2-based approach must be applied rather than an energy-based approach.

2. The consortium's proposal

Despite the bilateral meetings, the consortium of consultants, in their final report on benchmarks for the Iron and Steel industry, which was released on November 3rd, promotes an energy-based approach where allowances related to the CO2 in waste gases are divided between the waste gas producer and the waste gas user:

  • waste gas users receive a share to the extent of CO2 contained in natural gas which has the same energy content as the waste gas in question,
  • waste gas producer receives the CO2 content of the waste gas minus the part assigned to the waste gas user (e.g. in the case of blast furnace gas on average 79% of the CO2 in the blast furnace gas would be assigned to the blast furnace).

Whilst trying to seek consistency across the whole industry by treating waste gases leaving the boundaries as if it were natural gas, this system fails to take into consideration the main features of waste gases:

  • waste gases are not produced on demand but linked to the operation giving rise to them,
  • waste gases have a carbon content and calorific value varying over time which are linked to the process giving rise to them,
  • some waste gases (BF, BOF gas) have a low flame temperature which requires special equipment to reach a decent thermal yield,
  • waste gases can be recovered on site for heat production. However, heat consuming units are mostly not well-aligned to waste gas production, because of the differences in capacity and because waste gas production and waste gas needs are not perfectly matching over time. Since waste gases cannot be stored for a long period, the most technically and economically efficient alternative is to send them to a power plant.

For these reasons, waste gases must not be treated as commercial fuels but have to be granted, as the revised ETS Directive seeks to do, a special treatment.

2.1 Implications

The main concern for EUROFER with regard to the proposal of the consortium is that the allowances allocated to power plants might be lost since power plants are subject to full auctioning, even though the text of the revised directive allows free allocation for electricity generation from waste gases. (Article 10a 1 says “no free allocation shall be made in respect of any electricity production, except for cases falling within Article 10c and electricity produced from waste gases.”).

The way the consortium’s benchmarking system is designed (splitting waste gases by use) would almost automatically lead to the loss of a significant share of the waste gases sent to power plants. This would create an overall extra-shortage of ca 15% to 20% for the BF route (from 40 to 50 million free allowances1Such shortage would slash Steel industry's profitability by 35% (2003-2006 CO2 and financial data).) on top of the shortage already incurred through the benchmarks themselves.

The revised directive provides for auctioning for utilities because they are able to pass on their CO2 costs on their customers. Given the steel sector is a net electricity consumer, there is no windfall profit to be expected from electricity generation. Therefore, CO2 rights should cover the whole CO2 burden.

In the light of the above, the consortium proposal is not in line with the text of the EU ETS Directive for the following reasons:

  • the allowances needs of the best performers will not be covered (due to the missing part),
  • provisions of the EU ETS Directive in favour of the recovery of waste gases via electricity generation will not be fully met,
  • the level of shortage will be such that the Steel Sector, with its trade intensity exceeding 30% and its CO2 costs/GVA above 10% will be even more exposed to leakage.

Because of the way it is designed, the benchmarking system proposed by the consortium increases dramatically the CO2-related cost faced by the steel industry.

2.2 Flaws of the consortium benchmarking system

Besides the costs it implies, the system promoted by the consortium does have several flaws regarding:

  • the way it is supposed to bring incentives for CO2 mitigation,
  • administrability,
  • reproducibility and acceptance outside the EU.

2.2.1 Incentives for CO2 mitigation

The effectiveness of a benchmarking system can be apprehended through the incentives it provides to achieve the initial goals. The EU ETS directive states that the benchmarks should “provide incentives for reductions in greenhouse gas emissions and energy efficient techniques, by taking account of the most efficient techniques, substitutes, alternative production processes, high efficiency cogeneration, efficient energy recovery of waste gases, use of biomass and capture and storage of CO2, where such facilities are available, and shall not provide incentives to increase emissions.”

The system promoted by the consortium does not bring the proper incentives for CO2 mitigation:

  • The use of waste gases is carbon free. For each ton of steel, a plant will emit the same volume of CO2, whether or not it has invested in efficient waste gas recovery techniques. However, an increased waste gas recovery rate will decrease the overall CO2 emissions as waste gases will substitute other fuels in the units using them (heat or electricity production). This natural incentive for energy savings already led the industry towards an ever increasing energy and CO2 efficiency. The consortium system brings no incentive for an efficient recovery of waste gases beyond the natural incentive.
  • The proposed model brings no incentives for waste gases use: if waste gases are exported outside the steel plant, as the consumer of the waste gases has its CO2 emissions accounted for at the level of the natural gas equivalent, it has no incentive to use the waste gases. The waste gases consumer could indifferently switch to natural gas. However, the waste gases producer can hardly find alternative customers since this requires connections, hence restricting the possible users to a limited geographical area.
  • According to economic theory, for sectors as the steel sector which cannot pass their carbon costs on their customers, carbon emission reductions are only incentivized by the gap between the allowance price and the abatement cost, regardless of the allocation methodology. As a general rule, the ex-ante benchmarking system simply rewards early actions since best performers will receive a free allocation covering their direct emissions. The incentive lays in the CO2 price, not in the benchmark itself. Therefore, the free allowances cut entailed by the consortium benchmarking system will affect profitability, moving cash from the industry to the member states, whilst bringing no further CO2 mitigation incentive.
  • As a side effect, coke oven gas production is promoted: since coke oven gas has a CO2 emission factor ca 25% below natural gas, the system proposed promotes the production of coke oven gas. Regardless of efficiency issues, coke oven plants producing more coke oven gas (because of a poor fuel mix or ill operation) will be assigned less CO2 and hence setting the benchmark. In some situations, the system could even lead to a negative allocation.

2.2.2 Administrability of the system

In addition, the system proposed by the consortium raises serious concerns as to its administrability.

There exists no waste gas as such. Each waste gas is different, and it is not sufficient to distinguish coke oven, blast furnace and converter gases, but even within these categories there are many differences - sometimes also within the same installation at different points in time - regarding the required gas characteristics (energy content, CO2 emission, flame temperature and other parameters defining usability, etc.). In addition, companies normally use gas mixtures at the use stages.

The implementation of the consortium proposal will therefore entail severe data issues: the benchmarks construction step requires data on waste gases flows broken down by use for each benchmark to be gained with a sufficient level of certainty so as to build accurate and meaningful benchmarks. Yet these flows are usually metered with a poor accuracy (because of the carbon content and calorific value varying over time as these are directly linked to the process).

In most cases, these flows cannot be traced back for the reference period (2007-2008).

Therefore issues relating to data availability, data accuracy, margin of errors will horrendously complicate things and increase both collection and processing costs as well as increasing inaccuracies and risks of legal challenges to the process.

2.2.3 Reproducibility of the system outside the EU

The two issues of workability and operating costs make such a system highly improbable to be employable outside the EuropeanUnion like in developing countries. The difficulties entailed by such a system would never enable comparability with third countries, hence making sector crediting and sector agreements impossible.

3. The EUROFER benchmarking system.

The EUROFER benchmarking system is a CO2-based system in which all the CO2 is borne to the benchmark generating it. It concerns 5 intermediate products (coke, sinter, hot metal and EAF carbon steel and EAF alloy steel) where CO2 emissions resulting from waste gases are

  • fully covered by the benchmark and are
  • fully allocated to the waste gas producing installation.

Waste gas users will therefore bear no responsibility with respect to the CO2 contained in the waste gases. They would as a consequence receive an allocation only for their 'non waste gas' fuel consumption (via grandfathering).

CO2 mitigation is then incentivised through:

  • an increased control of the metallurgical processes, hence decreasing the carbon process emissions per tonne of product,
  • the efficient recovery of waste gases, hence decreasing the commercial fuel use.

Furthermore, it is :

  • simple,
  • robust,
  • and accurate (based on carbon mass balances).

3. Conclusions.

As a conclusion, in order to incentivise CO2 mitigation whilst protecting the Steel industry against the carbon leakage risk, the benchmarking system must be built upon the particularities of the Steel industry.

Waste gases are process emissions which are borne to the production process. They cannot be stored for a long period (only a few minutes). They can be recovered for heat production in downstream or upstream activities, but when these processes, for various reasons (temporarily not aligned capacities), cannot absorb the whole waste gas production, the only technically and economically viable option to recover them is by directing them to a power plant.

Waste gases cannot be treated as commercial fuels. Waste gases must be fully covered by free allowances so as to incentivise their efficient recovery, either by electricity or heat production.

Therefore, the CO2-based approach promoted by the EUROFER benchmarking system should be applied.

EUROFER - The European Steel Association

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