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Issues&Positions

Climate Change: Steel industry waste gases and benchmarking under trading period III of the Community's Greenhouse Gas Emissions Trading System - Questions & Answers

This document addresses questions regarding the treatment of steel industry waste gases with respect to the implementation of the revised Emissions Trading Directive. The document will be updated in line with the type of issues and questions as they appear in the debates.

Question 1: What is a waste gas ?

Answer:Waste gases are combustible process gases, which unavoidably come into existence when producing basic materials. The steel industry produces three types of waste gases: coke oven gas (“COG”), blast furnace gas (“BFG”) and basic oxygen furnace gas (“BOFG”). Closely related to the steel industry is the operation of blast-furnace-type ore-reduction processes for other ores than iron ore, which may also generate waste gases. A typical example is the production of liquid Ferro-Chromium in a blast-furnace-kind of reduction process, which also gives rise to a high energy containing waste gas.

Question 2: What is the main element of the steel industry's proposal for the treatment of waste gases under the revised Emissions Trading Directive ?

Answer:To assign all CO2 contained in the waste gases to the CO2 intensity of the steel making process which gives rise to the waste gases (= an aspect of benchmark definition). In addition, the proposal of the steel industry foresees to allocate all allowances to the producer of the waste gases (= an aspect of allowance allocation).

Question 3: A consortium working for the Commission also has presented a proposal. How does the approach of the Commission's consultants differ from the proposal made by the steel industry ?

Answer:The difference is that the proposal of the Commission's consultants introduces an element of energy directly into the calculation of the CO2-intensities from which benchmarks values will have to be derived.

With respect to the aspect of benchmark definition the proposal of the Commission's consortium suggests as a first step to identify the amount of energy contained in each waste gas. In a second step for each waste gas then an hypothetical amount of natural gas is calculated, which has the same energy content than each of the waste gases. In a third step a hypothetical amount of CO2 is calculated, which would be produced, if this hypothetical natural gas amount would be combusted. In a fourth step for each waste gas this hypothetical CO2 amount is subtracted from the amount of CO2, which will be produced if the waste gases are combusted. Thereby, the full CO2 correlated to the combustion of a waste gas is divided into two parts: The hypothetical CO2-amount (equivalent to an natural gas energy content) and the amount of CO2 left after subtraction of the hypothetical CO2-amount. In a fifth step every time a certain amount of waste gases is combusted (e.g. for producing heat or steam or electricity) the CO2 of the hypothetical energy equivalent of this waste gas amount will be assigned to the CO2 emission of the waste gas user whilst the “rest” will be assigned to the CO2-emission of the waste gas producer.

Concerning the aspect of allocation, each of the two CO2-parts will be allocated in line with the allocation rules applicable to the producer or the user of the waste gases. In the case of waste gas use for electricity production no free allocation is allowed and thus the CO2 related to the hypothetical energy equivalent in the waste gases used will not be allocated for free but will be subject to auctioning.

Question 4: Does the proposal of the Commission's consortium address energy efficiency correctly ?

Answer:The proposal of the Commission's consortium treats energy efficiency measures in the following way: The more the energy content of waste gases is exploited, the lower the benchmark-value of the waste gas generating benchmark will become.

In the case that waste gases are used for other purposes than electricity production, the combined amount of free allowances for which waste gas users and waste gas producers are eligible is not expected to lead to an undue shortage in comparison to the actual CO2 emitted by the best performing waste gas producer.

However, in the case that waste gases are used for electricity production the CO2 related to the electricity production cannot be allocated for free. Thereby, the overall amount of free allowances will lead to an undue shortage in comparison to the actual CO2 emitted by the best performing waste gas producer.

As a consequence the proposal of the Commission's consortium introduces a strong incentive not to produce electricity from waste gases. For three reasons this incentive is not correct:

  • The incentive against electricity production comes in the form of a shortage below any achievable performance of the main production process of the waste gas producer. This is not in line with the objectives of the revised Emissions Trading Directive because thereby the benchmarking system increases leakage risk.
  • The incentive is wrong because electricity produced from waste gases is produced without additional CO2. Against the background of the Community's climate change policies, objectives for security of supply and resource conservation objectives the production of electricity from waste gases should even be encouraged !
  • Already now, electricity from waste gases is only produced, if internal demands of the waste gas producer for heat and steam has been satisfied. Usually, there is no sensible alternative for the waste gas use to electricity production and therefore an additional disincentive against electricity production is not expected to bring any improvements in terms of CO2-abatement or energy efficiency.

Question 5: Why does auctioning for CO2 in waste gases used for electricity production (as proposed by the Consultants of the Commission) pose a problem for the steel industry ?

Answer:This approach does not take into account the non-linear relation between energy and CO2 in steel making from iron ore (“integrated steel production”). Integrated steel production is characterised by a double use of one and the same Carbon unit - first for process needs (in the form of coal and coke) and afterwards for energy production (after the unavoidable transformation of coal and coke into waste gases). This has the following consequence: Although energy production can be increased due to energy recovery (e.g. reduced flaring) and energy efficiency (e.g. high efficiency electricity production equipment), the Carbon needs for the main production process will not become lower !

The benchmark values for the waste gas producers as established by the proposal of the Commission's consortium are now derived by converting part of the energy into a “hypothetical” CO2 amount and subtracting this from the “real” CO2 emitted. In the case that the waste gases are used for other purposes than electricity production, this will not result in undue negative effects on the steel industry. However, if electricity is produced from waste gases, the amount of CO2 for which free allowances are available will be lower than is actually needed to cover the needs of the best performing waste gas producer. Due to the unavoidable nature of the waste gases the associated costs (due to auctioning or allowance purchases) will unavoidably have to be borne by the waste gas producer. In this sense the benchmark values the proposal of the Commission's consultants establishes for waste gas producers are not achievable.

Apart from the observation that this in effect introduces punishment for energy efficiency, more importantly it is also not in line with the leakage risk suppression aspect of the revised Emissions Trading Directive: If the benchmark value is unachievable, the result is the same as with auctioning – an extra cost which can neither be avoided nor passed through and thus will increase the likelihood of leakage.

Question 6: Will there be distortion on the markets for electricity by the steel industry ?

Answer:Against any yardstick there is no risk of distortion of electricity markets: The steel industry as a whole is short of electricity and the electricity produced is small compared to the Community's electricity market.

An internal survey by EUROFER covering 85% of the Community's steel production for the year 2007 showed that after balancing electricity production and consumption it appears that the steel making from iron ore (the “integrated steel making”) is a net consumer of roughly 10 TWh of electricity annually. The overall electricity consumption of integrated steel making has been estimated with 45 TWh. The overall electricity consumption of the Community is roughly 3 400 TWh.

In another approach one can look at the waste gases produced annually and estimate their hypothetical maximal potential for electricity production. As a starting point the waste gas production figures given in the Iron & Steel BREF can be used and combined and combined with energy content data for waste gases. The resulting annual energy content of waste gases will then be assumed to be transformed into electricity with an efficiency factor of 0.33. Thereby we receive at a theoretical maximum electricity production potential of roughly 90 TWh/a. This hypothetical potential however does not take into account that electricity production is always the last use waste gases are put to. If all waste gases would be used for electricity production only, there would be a need to produce heat and steam by using commercial fuels. The sector average of the share of waste gases which are designated for electricity production is roughly 50%. Thus, for practical purposes the maximal and highly theoretical potential for electricity generation would be at approximately 45 TWh/a.

Question 7: Waste gas users will be treated differently than operators, which have no access to waste gases. Does this different treatment pose a legal problem ?

Answer:When analysing this question, the starting point must be the unavoidable nature of the waste gases and its specific characteristics. Due to the unavoidability of waste gases, any additional costs or conditions of use imposed on waste gases eventually will fall back on the producer of the waste gases.

The steel industry as a producer of waste gases is thus in a very special position, which differentiates it from other sectors. In relation to other manufacturing industries the difference is established by the specific production processes and the existence of the unavoidable waste gases. With regard to the power sector in addition it must be taken into consideration that the steel industry is subject to leakage risk, whilst the power sector is not. Anyone who uses waste gases for electricity production is also in a special position because he cannot produce electricity according to the needs of the market but only in line with the waste gas generation and its composition. Any waste gas user applying waste gases to other uses than electricity production must also align his processes to the characteristics of the waste gases.

Against this background, the principle of equality applies which states that different situations must be treated differently. In addition any effect falling back upon the steel industry will constitute a disproportionate burden which is manifestly less appropriate than free allocation. Therefore, from a legal point of view the different treatment of waste gas users (and producers) does not constitute a legal problem but to the contrary is mandated.

Question 8: Are all steel making installations net electricity consumers ?

Answer:Only the “integrated steel production” has the potential for electricity production, if the calorific value of the unavoidable waste gases are exploited. These “integrated sites” produce steel, which is in need of very electricity intensive further processing (especially the forming operations). In a usual site configuration the demand of the electricity intensive process steps usually outstrips the electricity production potential. Due to the general need of the steel industry to increase the value added of the steel products (additional treatments are needed), this systematic shortage is expected to increase in time. Some “integrated sites” do not operate steel processing installations and in this case can have a potential to produce surplus of electricity from their unavoidable waste gases. However, all steel production must be matched by steel processing, which in these cases happens not to take place at the site on which the waste gases are produced but on another location. Therefore, also in these cases there is an overall net electricity consumption.

Question 9: The revised Emissions Trading Directive does not allow free allocation for any electricity production – does this not also apply to waste gases ?

Answer:The existence of unavoidable waste gases gives rise to an unresolvable conflict of objectives between two main elements of the revised Emissions Trading Directive. The nature of the waste gases makes it impossible on the one hand to comply with the rule not to allocate free allowances to the production of electricity and at the same time to provide for the allocation of free allowances to 100% of the needs of the best performers: Any part of the CO2 in waste gases which is not assigned to the CO2 intensity of the waste gas producer, will be missing in the benchmark value of the waste gas producer, who thereby will be systematically exposed to a shortage way below best achievable performance. The legislators were aware of this conflict and introduced an exemption for unavoidable waste gases from the rule of no allocation of free allowances to the production of electricity.

Question 10: Does the proposal of the steel industry introduce the risk of double counting of CO2 in the various benchmarks (and thus provide for overallocation) ?

Answer:For the purpose of the definition of benchmark values, the proposal of the steel industry assigns all Carbon contained in the waste gases to the source of the waste gases. None of the Carbon contained in the waste gases will be assigned to a CO2-intensity of a waste gas user. This has the consequence that none of the waste gas users can be included into any CO2-intensity distribution curve and thus they must fall out of any such benchmarks. Waste gas users would then be allocated against a fall-back approach, i.e. a fuel mix benchmark at the level of their 'non-waste gas' use. Since nearly all waste gas users are on-site of an “integrated plant” this does not matter, as also the Commission foresees a benchmarking alternative for the processing of steel (steel processing has less than 10% of sector emissions and a huge variety of products). Waste gas users outside the steel industry are extremely rare with rather small amounts of CO2 affected. Therefore, no double-counting can occur when the benchmark values are defined and also no double-allocation or overallocation during the allocation phase.

Question 11: Does the proposal of the steel industry introduce the risk of double counting of CO2 when monitoring for compliance is undertaken ?

Answer:The Carbon in the waste gases is accounted only once. For the monitoring system of the third trading period there are two possible developments. Monitoring can either continue as it is handled now under the trading period 2 (by registering what comes out of stacks) or it can be aligned with the benchmarking boundaries and calculation rules. In both cases the Carbon (= CO2) is only registered once either at the waste gas user or the waste gas producer.

Question 12: Does the proposal of the steel industry not lead to an undue double benefit for the steel industry, which will receive free allowances for the waste gases and may also receive compensation for electricity consumed which is made from waste gases ?

Answer:One of the main elements of the steel industry proposal for the treatment of waste gases is that waste gas producers and installations on a site for “integrated steel making” are not eligible for compensation. For practical purposes EUROFER encourages the Commission to include in the rules for compensation the principle of actual CO2-costs and a respective clarification of non-eligibility.

It is worth mentioning that the EU ETS Directive only forsees compensation for 'CO2 costs passed on electricity prices'. The CO2 costs element in electricity generation is not addressed in the text and therefore compensation cannot be claimed by companies operating a self-owned power plant run on waste gases on the grounds that they cannot pass CO2 costs in electricity prices on to themsleves.Such access to compensation would create a distortion between on the one hand units outsourcing their electricity production from waste gases which could claim compensation for the purchased power and on the other hand units using electricity produced from waste gases by their own power plant for which compensation is not possible. The granting of the full CO2 allocation to the source (waste gas producer) eliminates this distortion.

Question 13: Does the waste gas proposal of the steel industry make monitoring more complicated ?

Answer:In the case it would be decided by the legislators that the monitoring will be aligned with the benchmarking system, the same calculation rules, which are used for the definition of the CO2-intensities (which will be used to define the CO2-intensity distribution curves from which eventually the benchmarking values are derived) will have to be applied to the monitoring. In this case, the approach of allocating all Carbon in waste gases to its source provides for the more simple and robust methodology.

In the event that it will be politically decided that monitoring will continue as it is handled now under the trading period 2 (by registering what comes out of stacks) the monitoring requirements of the proposal of the steel industryare the same as for the proposal of the consortium of the Commission.

Question 14: Does the waste gas proposal of the steel industry introduce difficulties for allocation or surrendering of allowances ?

Answer:Under the currently applied stack-related system the question is: Who will be obliged to surrender allowances to the local authorities ? Currently, in the different Member States two systems for this are operated, both of which work well, are easily administered and can be used for the third trading period. In one system there is an obligation for the waste gas producer to pass allowances together with the waste gas to a waste gas user (who is obliged to surrender). In the other system the waste gas producer receives the obligation to surrender allowances to the extent of waste gas use by the waste gas user to the authority. If for the third trading period the monitoring would be aligned to the benchmarking system then allowances will be surrendered by the party to whom the emissions are assigned by the monitoring system. The proposal of the steel industrybrings no extra complexity compared to the existing system.

Question 15: Does the waste gas proposal of the steel industry introduce undue distortion of competition within industries with respect to their markets ?

Answer:Sectors under risk of carbon leakage as a principle cannot incur competitive disadvantages against each other due with respect to their markets due to exposure to different CO2 costs elements in their production. Would such differences in CO2 cost occur, they will not shift market shares between competing materials but will affect the sourcing of the materials. If in a hypothetical example, aluminium would be burdened with higher CO2 costs than steel, steel will not gain market share from aluminium, but aluminium would be supplied to the Community by those aluminium producers which do not bear the CO2-cost – these will be producers from outside the Community.

From a purely legal point of view it must be noted that competition can only be judged by looking at specific markets not at sectors. The Commission's decisional practice has consistently held that steel is not in competition with with other sectors to an appreciable extent.

Question 16: Does the waste gas proposal of the steel industry introduce undue unequal treatment within industries ?

Answer:The proposal of the steel industry will allow allocation to the full CO2-needs of the best performing steel production processes. Thereby the CO2-mitigation is maximised and the leakage risk minimised. This is exactly what the revised Emissions Trading Directive is aiming for. The same Directive mandates that other industries must be allocated against the same principles. Only if this is not adhered to (e.g. if the aluminium industry would not receive 100% of their electricity consumption allocated against their electricity consumption benchmark), there would be an undue difference in treatment. This difference would however not be rooted in the steel industry benchmarking model for waste gases, but due in an undue shortage of another industry.

Due to its processes and the existence of unavoidable waste gases, the steel industry is in a very special position, which differentiates it from other sectors. Therefore, the principle of equality applies, which states that different situations must be treated differently. Therefore, the different treatment of waste gas users (and producers) does not constitute undue difference in treatment but to the contrary is legally mandated.

Question 17: All industries have to buy their electricity consumption needs on the market and by doing so incur a CO2-price for which they must apply for compensation. Would there not be a competition distortion with the other industries, if the steel industry would receive no CO2-price for its electricity consumption ?

From an environmental point of view there is no need to introduce a CO2-price signal on electricity produced from waste gases. A CO2-price on electricity is only justified to the extent that the production of this electricity gives rise to additional CO2-emissions, which would not be there, if the electricity would not be produced.

If electricity is produced from waste gases this does not result in any additional CO2-emissions for the electricity production, because all the CO2 released by the combustion of the waste gases has been caused by the steel production and this CO2 will be released, independently if there would be electricity produced from the waste gases or not. One can claim that the use of waste gas is CO2-free.

By the same reasoning, it would not be justified to ask for compensation for electricity made from CO2-free fuel like waste gas.

In addition the principles of equal treatment and proportionality mandate a different treatment for the waste gas related electricity. Since the production of electricity constitutes a double use of Carbon (consequences for CO2 intensity see above) this is a situation clearly distinct to the case of use of commercial fuels.

From a technical point of view, the CO2 emitted by producing electricity from waste gases consists of carbon used for steel production. This carbon is not emitted as CO2 in the steel making process itself, but transformed into waste gas and this waste gas is delivered to a power producing installation, which eventually emits this carbon as CO2. Therefore, any cost imposed on the CO2 from electricity production is a cost which eventually has to be borne by the waste gas producer. Since the waste gases are unavoidable, so would be the CO2-cost element incurred by the waste gas producer and thus leakage will be fostered. However, the revised Emissions Trading Directive was designed with the objective to suppress leakage for leakage risk sectors.

As a consequence, the steel industry suggests to allocate all Carbon in waste gases to the CO2-intensity of the producer of the waste gases and not to make integrated steel production sites eligible for compensation, but assign principal eligibility for compensation only to steel production by “electric arc furnaces” and stand alone units. By this measure it is provided that the benchmarking system will be as simple as possible, that an extra incentive for energy efficiency and resource conservation is introduced and leakage risk avoided.

A final remark: Electricity produced from waste gases constitutes an extra environmental benefit generated from the carbon already used for steel production. This measure substitutes the use of primary fuels. By rough estimation the use of waste gases avoids the emission of roughly 50 Million tons of CO2 annually.

Question 18: Not all power plants have access to waste gases. Will the “lucky few” not gain an unfair advantage ?

Answer:Waste gases are unpredictable in composition and amount, because fluctuations in the steel production affects both. Waste gases need other equipment for transport and combustion than commercial fuels. Waste gases have lower performance than commercial fuels. In effect, the operator of a power station using waste gases cannot operate his plant with a view to the market needs for electricity but is forced to operate only in response to the waste gases as coming into existence due to the steel making process. Operators using waste gases are thus always disadvantaged against the operators of electricity generation using commercial fuels.

Question 19: Does the proposal of the steel industryhas the disadvantage that it does not provide a direct incentive against flaring of waste gases ?

Answer:As a matter of economic principle, an incentive to reduce CO2-emissions (which is the objective in minimising flaring) can not be introduced by means of allocation. Eventually, the incentive stems from the CO2-price (= costs to avoid or benefits to gain). Therefore, it does not matter, if an operator is above or below the benchmark value, the incentive is the same in both cases. If the emissions of an operator are higher than the benchmark value he will try to avoid the costs and try to recuperate more waste gas to substitute other fuels. If this operator is below the benchmark value he will try to maximise his benefit by investment in flaring minimisation measures. In both cases the operator will strive to avoid flaring.

It should be noted that both the proposal of the steel industryand the one by the Commission's consortium do include the CO2 from flaring into the CO2-intensity of the waste gas producer when calculating this CO2-intensity. Thus, the proposal of the Commission's consortium does not introduce any other incentive than the f proposal of the steel industry. There is a difference concerning the benefits to be derived from minimised flaring: According to the proposal of the Commission's consultants the beneficiary will be the waste gas producer whilst according to the proposal of the steel industry the beneficiary will be the waste gas user (which will euncourage to stick to using waste gases).

The proposal of the Commission's consortium results in benchmark values for the waste gas generator, which are impossible to achieve. This in turn is not in line with the leakage suppression objectives of the revised Emissions Trading Directive.

Question 20: Should there be a differentiation between waste gases submitted to flaring and other waste gas uses within the benchmarking system ?

Answer:The only way to directly introduce a different treatment is the creation of distinct benchmarks for flaring. However, the structure of the revised Emissions Trading Directive does not allow such a construction, because for the activity of flaring no reference product can be defined – which is one of the conditions for the creation of a separate benchmark.

The revised Emissions Trading Directive mandates that the system of free allowances must introduce incentives for efficient energy recovery. Flaring is not addressed specifically, but however its minimisation belongs to the category of energy efficiency measures. As outlined under another part of the Q&A-document, this incentive is introduced by the existence of a benchmark itself.

Question 21: Is there a difference in the CO2-distribution curves resulting from the application of the proposal of the Commission's consortium and the proposal of the steel industry?

Answer:EUROFER is conducting a data collection to establish CO2-intensity distribution curves for the steel industry benchmarks. This exercise is performed by an independent third party which is subject to very strict confidentiality rules. It appeared that whilst the data demands of the proposal of the steel industrycan be honoured by data with sufficient coverage and quality, this is not the case for the data needed to populate the proposal of the Commission's consortium.

This lack of data has some main causes.

The proposal of the Commission's consortium requires data on each waste gas flow when it is consumed (= when it enters a benchmark boundary). Energy management systems of integrated plants often do not monitor each of these streams but operate on energy balances.

Since the proposal of the steel industrydoes not take into account any waste gas flows, the definition of system boundaries does not have to take into account where waste gas flows are metered, where they are combined to create gas mixtures and where they are combusted (to produce heat, steam or electricity). These questions however become important in the proposal of the Commission's consultants. In the past efforts of parts of the steel industry to create energy indicators were severely hampered by these differences, which made agreement on generally valid system boundaries impossible. As a consequence it is not possible to create sufficiently comparable data on waste gas flows.

It is important to note that the problems described above do not pose a fundamental barrier to introduce respective monitoring systems in the future (albeit at some cost).

It however is not possible to accrue a complete data set for historical periods (2007-2008), as would be needed to establish the CO2-intensity distribution curves upon which the Commission will have to decide on its proposals for benchmark values.

Although the steel industry is not in a position to set up CO2-intensity distribution curves in line with the proposal of the Commission's consortium their qualitative difference compared to the CO2-intensity distribution curves created by the proposal of the steel industrycan be described:

The CO2-intensity distribution curves resulting from the proposal of the Commission's consortium would be characterised by less spread than the CO2-intensity distribution curves created by the proposal of the steel industry .

The CO2-intensity distribution curves resulting from the proposal of the Commission's consortium would be characterised by lower CO2-intensity values (below actual achievable best performance) than the CO2-intensity distribution curves created by the proposal of the steel industry.

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