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 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. But already today, additional general reductions in the amount of allowances need to be accepted even for best performing installations. The ensuing extra costs are detrimental to competitiveness; 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

  • Do not generate any unjustified cost increase in emission trading
    The best performing installations in Europe should not be burdened with undue direct and indirect ETS costs. With this in mind, certain rules are needed for free allowance allocation and electricity price compensation. A sufficient amount of allowances for industry is important. Also, Germany itself should bring electricity price compensation in a concrete shape, as is the case already today.
  • Enable growth: fair benchmarks and no general reductions in allocation
    Politicians should recognise the climate protection contribution through benchmarks. Moreover, they should not decide for further allocation reductions that can hamper growth. Benchmarks should reflect the achievable state-of-the-art and they should not be tightened generally.

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

Contacts

Jörg Rothermel

E-Mail: rothermel@vci.de