The European Commission has presented a legislative proposal to revise the EU emissions trading system (EU ETS) for the period after 2020, in line with the 2030 climate and energy policy framework and the Energy Union (EU) strategy.

It represents the first legislative step in delivering on the EU’s target to reduce greenhouse gas (GHG) emissions by at least 40% domestically by 2030 as part of its contribution to the new global climate deal due to be adopted in Paris in December.

The EU ETS is a cornerstone of the EU’s policy to combat climate change and its key tool for reducing industrial GHG emissions cost-effectively. It is the first – and still by far the biggest – international system for trading GHG emission allowances, covering more than 11,000 power stations and industrial plants in 31 countries, as well as airlines (in limited circumstances), and is looking to include maritime vehicles one day.

The EU ETS allows sites to operate under a permit and they must surrender carbon dioxide (CO2) allowances equivalent to what they have emitted. Sites are given varying degrees of free allowances from their governments, hence polluting above that allocation results in the need to buy allowances from the market.

The industrial gases business finds itself at the heart of this mandatory carbon reporting scheme by its very nature – not only are products of the industry such as carbon dioxide (CO2), nitrous oxide, sulfur hexafluoride and hydrofluorocarbons refrigerants all considered sources of GHGs, the energy intensity of the industry makes it a prime candidate for emission reduction targets.

The announcement to revise the EU ETS beyond 2020 is described by EU Commissioner for Climate Action and Energy, Miguel Arias Cañete, as a ‘decisive step’ and a demonstration that ‘Europe is once again showing the way and leading the global transition to a low-carbon society’.

To achieve the 40% EU target, the sectors covered by the EU ETS will be reducing their GHG emissions by 43% compared to 2005. Actions proposed to achieve this include increasing the pace of emissions cuts after 2020, and more targeted carbon leakage rules to safeguard the international competitiveness of the sectors most at risk of relocating their production outside the EU.

gasworld understands ‘carbon leakage’ is a situation when companies move production facilities outside of Europe to benefit from laxer constraints on greenhouse gas emissions.

The newly revealed proposal will now begin a legislative process lasting up to two years, involving Parliament and member states.

Electricity pilons with power station

Reaction

News of the revision appears to have been met with positivity by the Point Carbon analysts at Thomson Reuters, with Marcus Ferdinand, Head of EU Carbon Analysis at Thomson Reuters, commenting, “This proposal translates the EU’s ambition to achieve a 40% cut in emissions by 2030 into legal wording. It confirms that all reductions should be made within Europe as installations covered under the EU ETS will not be allowed to use any international credits after 2020.”

“How to share the free allocation among the different industry sectors will likely be the most controversial issue in the legislative process. The Commission’s proposal suggests a steady decrease in the free allocation to all industry sectors. In addition, it includes a new formula to identify the sectors most exposed to the risk of carbon leakage. Both these elements will likely be contested as being too ambitious by affected stakeholders and could cause some intense political debate.”

Such suggestions already seem to be well founded, with UK Steel describing the proposed EU ETS reforms as ‘another flawed solution’ and citing the carbon leakage measures as a particular source of discontent.

Gareth Stace, Director of UK Steel, responded, “The European Commission has proposed another flawed solution to the competitiveness issues the EU Emissions Trading System (ETS) causes for UK steel. This smacks of two steps forward and one step back.”

“UK steel plants are trying to compete internationally against companies facing none of the same compliance costs. The ETS’s carbon leakage measures are meant to address this by ensuring the best-performing plants in the EU are given all the ETS allowances they need for free – but neither the current measures, nor the Commission’s new proposals, live up to this promise.”

“At this stage it is impossible to know what the exact effect on the UK steel sector could be. However, the Commission’s proposal has failed to address the main problem with the existing system: the arbitrary cap on the number of allowances that can be given to industry.”

Metals, Glowing-molten-hot-steel

UK Steel’s reaction to the news will perhaps resonate with those in the region’s industrial gases business.

gasworld understands that the main impact of such carbon reporting schemes on the gases industry comes from the knock-on effects in terms of electricity price rises (as power stations are obligated under EU ETS to buy allowances) and via customers; the glass or steel industries, for example, who fall under EU ETS and find it makes operating in Europe more costly.

It is also just weeks since the announcement of a new 15-year supply agreement between BOC and SSI Steel UK, a major integrated iron and steel manufacturing facility based on Teesside. BOC has invested £25m in its Teesside site to support the contract, including an upgrade and expansion of three existing ASUs which supply the SSI site.