Eurofer analysis on the Communication COM (2010) 265 on Options to Move Beyond 20% Greenhouse Gas Emission Reductions and Assessing the Risk of Carbon Leakage
The Communication provides an analysis on the possibilities to step up the Community's pledges beyond 20% and on the competitive situation of carbon leakage risk sectors in the light of the results of COP 15. The Communication is a remarkable effort to define in a very compressed format the main and overarching aspects which influence and guide the Community's climate change policies.
Unilateral increase by the EU of its climate change reduction objective and the competitive situation of sectors exposed to leakage risk
Eurofer welcomes the fact that the Communication reconfirms the conditions set by the European Council in December 2008 for expanding the Community's unilateral commitments above minus 20% by clearly stating that other developed countries must commit to comparable reductions and economically more advanced developing countries must contribute according to their capabilities ad responsibilities. The Communication states that, today, these conditions are clearly not met. This is in line with the constant position held by Eurofer which has opposed a unilateral move by the EU
With respect to the competitive situation of sectors exposed to leakage risk in the wake of the Copenhagen negotiations, the Communication adopts the generally accepted analysis that the Copenhagen Accord in itself is not sufficiently strong and comprehensive enough to alter the conclusion that free allocationand access to international creditsremain justified.
Analysis of the - 20% target
The main conclusions of the authors of the Communication is that compliance with the 20% target is now cheaper than assumed in 2007. This result rests on three elements all linked to the crisis of 2009:
Eurofer has some strong reservations on the basis of these findings and would appreciate if the Commission could take the following comments into account:
Concerning steel production the information available to Eurofer indicates that currently a fragile recovery can be observed, which is largely driven by stock replenishments and less by consumer demand. Significant macro political and macro economical uncertainties do not allow any prognosis beyond end of 2010. However expectations of markets that this technical rebound will lead to a recovery is reflected in current CO2 prices. In spite of the crisis, these CO2 prices have already doubled since the height of the crisis from 8 Euro to 15 Euro per ton of CO2 (otherwise the allowance prices would already now be close to zero).
Discussion of a “green technology revolution”
The Communication also provides an overview of the main levers available to reduce emissions. From the outset, Eurofer observes that the concept ofa “path of abatement” is misleading. As the benchmarking exercise shows for manufacturing industry there is a technological bottom for CO2 efficiencies which can only be overcome by radical breakthrough innovations. Therefore any “early investments and efforts” will not bring manufacturing industry on something like a “path”. Such efforts can only pave the way for possible breakthroughs which, if actually found, would lead to a change resembling rather more to a sudden phase change than to a smooth transition. Eurofer hopes that this element will be part of the reflection.
In the table below Eurofer has sumarised economic activities, which according to the Communication provide levers for emission abatement, and the corresponding political framework to maximise the respective contributions to emission abatements.
|Lever||Eurofer view on best suited measures|
|Industrial manufacturing processes||
R&D support for breakthrough technologies
|Large scale energy infrastructure||Coordinated long term investment decisions by the Member States|
|Electricity generation||CO2 price|
Eurofer fully shares the focus on the four levers identified but expresses concern that the importance of CO2 price signals for the “green technological revolution” is overstated in the following areas:
Analysis of the 30% target
With respect to the ETS sectors the Communication states that the greatest potential for emissions reductions comes from the electricity sector and that tightening the ETS cap in the electricity generating sector only is sufficient. This is further underpinned by the modelling assumption explained on page 52 of Part II of the Staff Documents which assumes full coverage by free allowances for the manufacturing sector.
On the one hand Eurofer interprets this as a very positive clarification concerning the nature of manufacturing industry operations. Thereby the Commission implicitly confirmsand supports the long time request of the business community to take into accountthat manufacturing processes cannot deliberately reduce CO2 per reference product but are bound to laws of nature and technical development and the restrictions imposed by these.
However, explicit clarification is missing how an increased target will not lead to the application of the “correction factor” on manufacturing industry.
There is another aspect of concern, which relates the impact of higher electricity prices on manufacturing industry. The Emissions Trading Directive has the defect that it does not address this aspect of leakage on the same level as leakage risk caused by direct emissions. This aspect will become even more pronounced, if indeed it would be intended to achieve an increase in the target above 20% by reducing the “sub-cap” of the electricity generators.
The section on “Options Inside the ETS” of the Communication stresses the idea of increasing the allowance price which would allow strengthening the incentive effect of the carbon market. To Eurofer this approach is most likely in conflict with Article 1 of the ETS Directive which stipulates that Emissions Trading shall serve to promote reductions of emissions in a cost-effective manner. In addition, it does not take into account the comment made above in respect of the abatement path, i.e. that for some industries only a breakthrough technology can result in significant CO2 reductions. In those situations, a higher CO2 price will not have an incentive effect but will result on an increased risk of carbon leakage and an impact on competitiveness of the industry in Europe.
Leakage risk assessment
The results of the modelling performed with respect to leakage risk produce surprising low figures on assumed production losses under all combinations of the lower and upper ranges of the pledges made by countries under the Copenhagen Accord (especially the EU pledges of between 20% and 30%). In the case of both 20% or 30% as an EU pledge the expected production losses are around 1% (with some exceptions going up to 3.5%).
On page 52 of Part II of the Staff Documents as well as on page 11 of the Communication it is explained that the models assume free allocation of allowances to manufacturing industries. However, it is not expressed to which extent these allowances cover the best performer needs. Only by assuming full coverage for at least the best performers, the low production loses can be understood. However the actual approach taken by the authors of the Communication needs clarification. The possible interconnection of low production losses and free allowances however underlines the general position of Eurofer that free allocations are both needed as the first and most effective measure to combat leakage.
The fact that reductions of free allowances below best performer values would indeed have a significantly higher impact can be derived from possible effects on profits. For example a study on the steel industry1Indicators of the Risk of Carbon Leakage, NERA Consulting, December 2008 found exemplaric impacts on GVA between 30% and 40% and short term profit margin reduction between 100 % and 400% in case of loss of free allocation. It is obvious that such impacts will not be without significant consequences for production.
Eurofer emphasises that border measures shall not be considered as a primary means to act against leakage risk. Border measures can not substitute either measures for free allowances or a comprehensive international agreement which provides equal treatment for globally traded goods. Eurofer however reaffirms its position that border measures should be kept on the table as a complementary negotiating tool and further work should be done on how a cross-border mechanism can be designed in line with the EU’s obligations under WTO.