Position papers

Compensation of indirect carbon costs in the post 2020 EU ETS

Contribution to the public consultation.

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Several elements of the draft text (e.g. state aid intensity limited at 75%, exclusion of sectors in the steel value chain such as industrial gases, mining of iron ores and tubes) undermine significantly the effectiveness of the provisions to prevent the risk of carbon leakage because they result in a very low level of compensation (up to less than 50% of the actual indirect costs).
If the default aid intensity is not increased to 100% of the benchmark, the possibility for member states to grant compensation beyond 75% is an important step to reduce indirect costs to eligible sectors.

The additional compensation should be set so that indirect costs are capped at 0.5% of the GVA and should be open to all eligible sectors and not restricted only to some of them. Furthermore, it should be accessible to both the electric arc furnace (EAF), which uses large amount of electricity
to melt and recycle scrap, and the integrated route, which consumes electricity produced from the combustion of recovered waste gases generated unavoidably by the steel making process.

Similarly to the allocation of free allowances to the heat consumer under the rules on free allocation for the direct emissions, the consumption of industrial gases (e.g. oxygen, hydrogen, etc.) should also be considered as eligible for financial compensation when it occurs in a sector that is exposed to indirect carbon leakage such as steel and state aid should be granted to the exposed sector.

Sectors (mining of iron ores and seamless pipes) belonging to the steel value chain need to remain eligible for compensation since they are already recognised at risk of carbon leakage in phase 3 and they contribute to the carbon leakage exposure of the steel industry.

The proposal of splitting existing regions contradicts the political objective of linking more the national energy markets. Furthermore, the overly strict methodology for defining regional areas (1% price divergence in significant number of hours per year) does not capture the reality of energy
markets where the emission pass through factor is influenced by neighbouring member states due to interconnections. Hence, the existing regional areas should be maintained.
➢ Compensation should not be made conditional because it does not distort incentives for energy efficiency investments, since it is based already on very strict benchmarks. If now state aid is made conditional to additional measures to be taken by the company, de facto it is not anymore a (partial)
reimbursement of incurred costs as it requires additional costs to the company.

The fall-back benchmark (80% of reference electricity consumption) should not be reduced further, since it entails already a major reduction of aid.
➢ The steel industry (NACE code 2410) is recognised as eligible for indirect costs compensation in the draft Guidelines but the consultants’ study classifies the sector only at medium risk. Even though there is no different treatment, we are providing evidence which indicates that steel is at very high risk of carbon leakage.

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Published: 01 January 2020


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