CONTRIBUTION TO THE PUBLIC
Ref. Ares(2020)3607717 - 08/07/2020
Ref. Ares(2021)4414341 - 07/07/2021
CONSULTATION ON
COMPENSATION OF INDIRECT CARBON COSTS IN
THE POST 2020 EU ETS
OUR KEY MESSAGES
➢ 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 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 belonging to the steel value chain (
mining of iron ores and seamless pipes)
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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Introduction
The EU ETS Guidelines are an essential element of the legal framework that aims at preventing the
risk of carbon leakage. In line with the spirit and wording of the EU ETS Directive, the ultimate
objective of both free allocation and indirect costs compensation is to avoid undue costs at the
level of best 10% performers in the EU. The Guidelines should be developed and implemented in all
member states in view of reaching that objective. This is even more urgent now due to the higher
carbon price compared to phase 3 and in view of the development and uptake of low carbon
technologies that will increase substantially the (direct and/or indirect) electricity consumption in
the steel sector.
Indicative impact assessment of the draft Guidelines on the steel sector
The steel industry (NACE code 2410) is recognised at risk of carbon leakage in the draft Guidelines
and hence is eligible for compensation of indirect costs. Yet, several elements of the draft text
undermine significantly the effectiveness of the provisions to prevent the risk of carbon leakage
because they result in a very low level of compensation when compared with the actual indirect
costs of a steel site. The following indicative assessment can be provided:
• 25% shortage due to state aid intensity capped at 75% (if the sector is excluded from the
possibility of additional aid beyond 75%);
• 20% shortage due to benchmark (at least for the fall-back benchmark);
• 20-25% shortage due to exclusion of sub-sectors in the steel value chain (at least in the BF/BOF
route) such as industrial gases (NACE code 2011) and mining of iron ores/sintering (NACE 0710).
As a result of the restrictions mentioned above, the compensation could cover even less than 50%
of the actual indirect costs borne by a steel producer. Therefore, these elements of the draft
Guidelines need to be improved in order to provide effective prevention of the carbon leakage risk.
Sectoral eligibility: sectors in the steel value chain (industrial gases, iron ores and tubes)
In addition to direct electricity consumption, the steel sector uses significant amounts of industrial
gases (NACE code 2011) for unavoidable purposes such as oxygen which have an important
electricity consumption embedded. On the basis of the data from the Best Available Techniques
Reference document (BREF), the embedded electricity consumption is estimated at 24 kWh/t crude
steel in the EAF route and 92 kWh/t in the BF/BOF route (which is around 20-25% of the total
electricity consumption in BF/BOF route). The lack of compensation for the indirect costs linked to
industrial gases further exposes the steel sector to carbon leakage risk. Therefore, 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 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. Such treatment would be important in the
context of the medium to long term transformation of the sector, whose breakthrough
technologies will need large consumption of industrial gases like hydrogen.
Furthermore, it should be noted that also the NACE code 0710 (Mining of iron ores), which is eligible
for financial compensation in the EU ETS phase 3, is very important for the steel sector as it is within
the same value chain. Even though it has a different NACE code than steel making (NACE 2410),
actually it covers the activity of sintering of iron ores that is performed in the integrated steel sites.
Since it contributes to the overall exposure to the indirect carbon leakage risk of the steel industry,
it is important that it remains eligible for the post 2020 period.
Finally, in the EU ETS phase 3 seamless steel pipes were also included in the list of eligible sectors
as they are closely linked to the steel sector because they represent a very electro-intensive process
similar to other hot/cold rolling processes. Therefore, they should remain eligible.
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Default aid intensity and possibility for additional aid
The steel sector is highly exposed to carbon leakage risk linked to indirect costs and is unable to
pass through unilateral regulatory costs without genuine risk of losing market shares. This risk is
even more relevant in the context of much higher carbon prices compared to the ones experienced
until 2017. Furthermore, affordable and competitive electricity prices are essential to facilitate the
transition to breakthrough technologies which require even larger amounts of electricity.
Therefore, it is important to set the aid intensity at 100% of the benchmark; any reduction of the aid
intensity below the benchmarks undermine the effectiveness of the carbon leakage provisions as
long as there is no comparable climate legislation in competing countries.
Even 100% aid intensity would not mean full compensation of indirect costs, as it would still be
capped by the very strict benchmarks. For instance, in fall back benchmarks, it would still be
reduced by 20% compared to the baseline electricity consumption; i.e. with the current 75% aid
intensity level fixed in 2020, the installations in fall back may receive compensation only for 60% of
the indirect costs (75% of 80%). This is far below the maximum aid intensity level according to EU
state aid rules.
If the default aid intensity is not increased to 100% of the benchmark, introducing the possibility for
member states to grant additional compensation beyond the default value 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. This possibility 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 has very high
electro-intensity because it 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. Financial compensation for this case is
explicitly mentioned in recital 13 of the post 2020 EU ETS Directive in order to preserve the incentive
to recover waste gases, since free allocation is granted only partially for waste gases’ emissions.
Therefore, if the option of granting additional aid beyond 75% is retained, it should consider not
only the electro-intensity, but also the actual carbon leakage risk and the environmental purpose
of the state aid (i.e. promoting the recovery of waste gases).
Finally, it should be noted that undertaking specific assessment need to take into account the
actual specificities of the sites. The GVA of companies is highly dependent on their structure,
including the configuration of the production steps where the higher share of value added is
generated. Hence, a site assessment would also be necessary where appropriate. Furthermore,
company-specific assessment on electricity consumption should not lead to unintended results in
case energy efficiency measures that have been already implemented.
Conditionality
Compensation should not be made conditional on additional requirements. In fact, this kind of state
aid aims at reimbursing partially the energy consuming sectors for the indirect costs passed on in
the energy bill. If now state aid is made conditional to additional measures to be taken by the
company (i.e. investments in energy efficiency or emission reductions and carbon free power
purchase agreement,) de facto it is not anymore a (partial) reimbursement of incurred costs since
it requires additional expenditure to the company. As the eligible sectors are acknowledged as
being at risk of carbon leakage (on the basis of market characteristics, profit margins and
abatement potential), the missed reimbursement would create the conditions for the
materialisation of such risk, leading to an increase in global emissions.
Energy efficiency improvements are a must for industries with high energy costs in order to remain
competitive. Compensation of indirect costs does not distort incentives for energy efficiency
investments because it is still based on very strict benchmarks reflecting the best performance in
the sector (and actually the state aid intensity does not even cover the full benchmark but only 75%
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of it). Furthermore, the “incentive effect” is also preserved by the fact that the benchmarks will be
updated during the phase 4, so that companies have further interest in improving performance,
where technically possible.
Furthermore, the proposed conditionality requirements are actually linked to the implementation
and enforcement of other pieces of legislation (notably the Energy Efficiency Directive and the
Renewable Energy Directive). However, member states retain the possibility of adopting different
instruments to promote energy efficiency and renewables in order to achieve the targets set in
such legislation. Therefore, the conditionality requirements would overlap and possibly collide with
different national measures.
Finally, the three proposed conditionality requirements present several specific limitations:
• The energy efficiency investments with a payback period of 5 years do not reflect the reality
of business decisions in the steel sector, which are bound to a significantly shorter period.
Furthermore, the draft text does not take into account early actions such as recent energy
efficiency investments.
• The requirement to install an onsite renewable energy generation facility covering at least 50%
of the electricity needs does not match with the very large energy consumption of industrial
sites and the physical limits of such on-site generation. As an indicative example, an average
electric arc furnace producing 700,000 tonnes of steel per year consumes around 450,000
MWh of electricity and an average integrated site producing 4 million tonnes of steel per year
consumes around 1,800,000 MWh. Assuming an on-shore wind turbine with 3 MW installed
capacity operating 2,000 full load hours/year, the electric arc furnace would need around 40
turbines to cover half of its electricity needs and the integrated site around 150 turbines.
Considering the land requirements and also the regulatory restrictions to the instalment of
such turbines, this conditionality requirement is not technically nor financially feasible, hence
it cannot be achieved realistically by the eligible sectors.
• The requirement to invest at least 80% of the received state aid into investments to reduce
direct emissions of the installation is not consistent with the scope of the Guidelines which are
targeting indirect costs.
Emission factor and regional areas
As a matter of principle, the CO2 emission factor must reflect the full indirect CO2 burden, i.e. the
actual CO2 cost passed through into prices. The approach of using historical empirical data on the
fossil emission factor in the relevant regional market should be maintained in order to ensure a
consistent and stable framework. The calculation of this factor should be based on reliable and
transparent sources in order to reflect the real costs faced by the industry. The proposal of splitting
existing regions in more areas does not provide details on the underlying evidence and 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.
Update of the fall-back benchmark
The draft guidelines do not indicate the default value of the fall-back benchmark. In phase 3, this
was 80% of the reference electricity consumption. Since this represents a major reduction of aid, it
should not be reduced further, otherwise the state aid would be insufficient to achieve its objective
of avoiding the risk of carbon leakage. It should also be noted that the reference fall back
benchmark in the free allocation rules for direct emissions is the process emissions benchmark,
which is much higher than the electricity fall back benchmark (97% of historical process emissions)
and most importantly has not been further reduced between phase 3 and phase 4.
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