Adequate Carbon Leakage Protection in ETS

Climate Protection and Emission Trading

Arguments and Positions

The reform of the EU emission trading system (ETS) - adopted in early November 2017 - will lead to the removal of chemical sectors from the carbon leakage list. Consequently, impacted companies will only receive 30 percent of free allowances, even though they are engaged in international competition. Moreover, the market stability reserve was tightened and allowances are deleted. This reduces the total amount of allowances, which is unnecessary for reaching the EU's climate target.

Also, yet more reductions in the amount of allowances are threatening, because the Member States are permitted to delete allowances from the emission trading sector, e.g. in the event of national closures of power plants or to offset such amounts of emissions in the non-ETS sector. This will artificially make allowances even scarcer and erode the trust of ETS market players.

In 2014 the European Council had decided for a greenhouse gas reduction target of minus 40 percent to 2030, as compared with 1990. This was implemented in the most recent reform. For the emission trading sector − which includes, inter alia, the chemical industry − this means a tightening of the annual reduction from currently 1.74 to 2.2 percent from 2021. The new target, together with the other adopted measures, brings higher allowance and electricity prices: In the medium term, the EU Commission expects at least 40 euros per tonne. In the German chemical industry alone, this would lead to costs of 2.3 billion euros annually in the purchasing of electricity. But compensation, as is currently granted under today's rules, would only reduce this total by just under 550 million euros. Additionally to electricity, the chemical industry expects several hundreds of millions of euros for purchasing allowances for emissions from production.

Competitiveness at risk
The chemical industry contributes to reducing production-related greenhouse gas emissions. Here, benchmarks for installations have a role by setting reference values for the allocation of free allowances. Their review is still forthcoming, however, a tightening is already planned. But additional general reductions in the amount of allowances need to be accepted even for best performing installations. Here, particularly the "heat benchmark" is decisive; this benchmark addresses the heat production subject to emission trading.

All these extra costs from ETS are detrimental to competitiveness. As there is no level playing field in competition internationally, there is the risk of carbon and investment leakage.

Carbon leakage measures remain necessary
The Paris climate agreement has not brought comparable rules for competition at a global level. Therefore, measures remain necessary to prevent production relocations to regions outside the European Union. EU companies need to receive sufficient electricity price compensation to protect against so-called "carbon leakage".

THE VCI IS CALLING FOR THE FOLLOWING

  • Direct costs: ensure adequate carbon leakage protection
    In order to limit the cost impacts of the adopted changes in ETS for the chemical industry, it is essential to have as many chemical sectors as possible on the carbon leakage list so that these have no additional general reductions in the allocation of allowances. It is also important that the planned tightening of benchmarks reflects the achievable state of the art. Furthermore, the availability of resources needs to be taken into account for the heat benchmark.
  • Indirect costs: full electricity price compensation is needed
    A degressive method should be avoided in the forthcoming European shaping of the electricity price compensation so that the competitiveness of companies can be preserved. Furthermore, all chemical sectors with a carbon leakage risk need to be among the beneficiaries and, at least the electricity-intensive ones, need to have full compensation. The German implementation of the electricity price compensation must not fall short of the European framework.

For questions or suggestions, please feel free to contact us.

Contacts

Jörg Rothermel

E-Mail: rothermel@vci.de