POSITION PAPER
16 March 2015
BUSINESSEUROPE response to the consultation on
the revision of the EU ETS Directive
This paper outlines BUSINESSEUROPE response to the public consultation on
the revision of the European Emissions Trading Scheme (EU ETS) Directive.
BUSINESSEUROPE has consistently advocated for a thorough reform of the EU
ETS which should remain the main tool to reduce industrial emissions at the
lowest cost and to promote investments in low carbon technologies. It should
provide a common regulatory framework for both the power sector and covered
energy intensive sectors. However, as long as there is no global level playing
field, the EU ETS must also address the loss of competitiveness of energy-
intensive and trade-exposed industries through evidence-based effective
measures for carbon leakage protection. BUSINESSEUROPE vision for a
reformed EU ETS encompasses the redefinition of carbon leakage, the
introduction of a more dynamic allocation system and the elimination of the C-
factor, harmonized compensation for indirect costs as well as consistent funding
for innovation.
1. Redefining carbon leakage
The European Council conclusions of October 2014 have clearly laid out that carbon
leakage measures should not expire as foreseen in the current legislation, but should
continue after 2020 as long as there are no comparable efforts to reduce emissions in
other major economies. BUSINESSEUROPE has also previously provided its input to
the EC consultation on carbon leakage measures post-2020.1 The following points aim
to provide guidance on how the principles enshrined in the Council conclusions should
be reflected in the future.
The current carbon leakage definition has proved insufficient to address industry’s
competitiveness exposed to international competition. A strengthened approach to
what is meant by displacement due to asymmetrical climate policies should encompass
the broader notion of investment leakage. There is
clear evidence that investment in
the EU is falling particularly in the energy-intensive sectors. For the whole, EU
average annual investments by energy-intensive industries have decreased decisively
more compared to other sectors in relation to pre-crisis levels. This has to be seen in
the context of growing investments of energy intensive sectors in other regions of the
1 BUSINESSEUROPE response to the consultation on ETS post-2020 carbon leakage provisions, 31 July
2014
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world. In Germany, for instance, energy-intensive industries have pulled back domestic
investments between 1995 and 2011, where investment has decreased 11% while
other industries have increased 5%.2 There is also evidence that the chemical industry
in the Netherlands and Belgium has seen investment leakage with a negative impact
on the value chain.3 In comparison with other world regions, there is a growing focus on
the US with many EU companies turning to North American markets instead.4 This is
inextricably linked with the high energy prices industrial consumers are facing in the
EU. These facts, coupled with the future impact of the Market Stability Reserve (MSR)
on carbon prices call for urgent measures for shielding European industry from serious
competitive disadvantages and loss of competitiveness.
In addition, as provided by the new Environmental and Energy Aid Guidelines, carbon
leakage must also go beyond the carbon price by factoring other elements in the
definition such as the cost impact of overlapping energy and climate measures, notably
subsidies to renewable energy and energy efficiency policies.
2. Introducing dynamic allocation
A more accurate model for carbon leakage measures will make the ETS more fit for
purpose, by being more adaptable to sudden changes in the economy. The lack of
European industry policy and the increasing production costs generated by the energy
and climate policy have contributed to an investment leakage. For sectors at risk of
carbon and / or investment leakage,
full compensation through free allocation based on feasible benchmarks must allow the most efficient European companies to be
globally competitive without being penalized by direct carbon costs. The existing
allocation system based on historical production has proven to be too rigid and
distortive.
Real / recent production levels – combined with economically and
technically feasible benchmarks –
should be considered as an option for the
allocation of free allowances in order to provide better protection against carbon
leakage and to avoid problems deriving from over or under allocation.
Therefore, a dynamic allocation model based on realistic benchmarks and actual
production should be introduced. In the absence of an international agreement,
allocation based on historical production and the application of the cross-sectoral
correction factor harm competitiveness and encourage production and investment to
take place outside the EU.
2 Deutsche Bank Research, Carbon Leakage:
Ein schleichender Prozess, 18 December 2013
3 Contribution to a future oriented energy strategy for the chemical industry,
Impact of energy and
feedstock costs on the competitiveness of the chemical industry in the ARA-cluster, 6 May 2014
https://www.vnci.nl/Content/Files/file/Downloads/Finaal_%20Report_essenscia-VNCI_140507.pdf
4 BASF:
http://www.nytimes.com/2014/10/25/business/international/basf-an-industrial-pillar-in-germany-
leans-abroad.html?_r=0
BUSINESSEUROPE response to the consultation on the revision of the ETS Directive
16 March 2015
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For that purpose, an allocation supply reserve should be considered allowing for
allocation based on actual production. This reserve should be funded up-front with
allowances that are to be taken out of the current market supply. This allocation supply
reserve can also operate alongside the MSR; because of their different purposes and
triggers, they can act independently. The MSR has been created to improve supply-
demand balance and is triggered by surplus while an allocation supply reserve would
be meant to prevent carbon leakage and would be triggered by economic cycles.
3. Compensating for indirect costs
It is of equal importance to handle the indirect effects, occurring from the pass-through
cost of carbon into the electricity price. Compensation must be given in relation to
actual costs passed-through before and beyond 2020. The current framework only sets
maximum compensation levels allowed through state aid guidelines for a list of
industrial sectors different from the direct emissions carbon leakage list, and it is
voluntary for each Member State to give this compensation. The current guidelines
generate competition distortions among member states (by singular political decision in
favour of compensation) and sectors (by arbitrating fuel against electricity). It is
therefore necessary to
set mandatory and harmonised EU compensation
measures and to review the list of eligible sectors to achieve full offsetting of indirect
costs in all Member States and to insure technological neutrality. Especially in the case
of an increasing EU carbon price, this should be developed through a harmonised EU
approach using specific mechanisms, such as the use of auctioning revenues or
additional free allocation rather than through state aid rules.
4. Eliminating the C-factor
The current cross-sectoral correction factor constitutes a disruptive element for already
committed investments in industry, as well as a source of uncertainty for investments
going beyond 2020. The C-factor elimination stems from the need to provide for an
effective carbon and investment leakage protection. The current free allocation system
of allowances based on benchmarks combines the need for competitiveness (free
allowances) and for incentives in reducing GHG emissions (benchmarks). For the
future, post-2020,
European industrial growth will be best supported if there will
only be the overall ETS cap and free allowances volumes are based on actual
production rather than on historical data. This could be supported for example
through a more dynamic allocation model.
If the current ETS rules are maintained up to 2030, the C-factor would have as
consequence that even the most CO2-efficient companies would be up to 40% short
yearly on their needs for emission allowances.
BUSINESSEUROPE response to the consultation on the revision of the ETS Directive
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5. Funding for innovative technologies
The European Council conclusions provide for the renewal of the existing NER300 fund
with an initial endowment increased to 400 million allowances, to be extended beyond
carbon capture and storage and renewables, to also cover low carbon innovation in
industrial sectors. As the EU ETS has been primarily designed as an emissions’
reductions tool, it is necessary to seize the reform of the ETS Directive to create a legal
basis to unleash these credits for innovation. Taking stock of the current NER300, it is
evident that the red tape criteria made it difficult for projects to be eligible for funding. A
more flexible fund with an improved design should succeed NER300.
All ETS auctioning revenues should be used more cost-effectively and efficiently
to assist the decarbonisation of European industry without impairing its
international competitiveness. Half of auctioning revenues should be re-used to
decarbonise the ETS sector. This has not been the case so far, a missed opportunity to
pursue an active industrial policy. The other half should be used, (in a coherent EU-
wide approach on compensation for indirect costs) to prevent carbon leakage.
BUSINESSEUROPE welcomes in particular the creation of an innovation fund in the
MSR. However, taking into account the political support for an early start,
BUSINESSEUROPE considers this must be accompanied by consequent measures.
By boosting the carbon price, the MSR is of high relevance to the competitiveness of
EU companies. Thus, the earlier it starts, the earlier the MSR will impact on carbon and
electricity prices. Therefore any anticipation of the start date should be clearly coupled
with strong provisions on carbon leakage both for direct and indirect costs. In particular,
the resources provided by the MSR must be used to earmark backloaded and
unallocated allowances for innovation as well as for dedicated carbon leakage
purposes.
It is necessary to ensure that these innovation schemes are structured in a consistent
way to provide the missing element in the climate package.
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