http://www.fertilizerseurope.com/documents/file/Integer%20summary%20presentation%20for%20web%20versi

Carbon leakage in the European fertilizer industry: implications of free allowance benchmarks for ETS III Summary report December 2010

December 2010

Carbon leakage and the European fertilizer industry

Key findings In this report we show that DG CLIMA’s proposed free allowance benchmarks for ammonia and nitric acid will result in carbon leakage.

Our starting O t ti assumption ti iis th thatt carbon b lleakage k would ld b be an undesirable d i bl effect ff t off th the EEmissions i i TTrading di Scheme III. We demonstrate that: • Ammonium nitrate, Europe’s most important fertilizer, is affected by both the ammonia benchmark and the nitric acid benchmark. Carbon costs on these products will have a cumulative impact on the producers d off ammonium i nitrate. i • The proposed benchmarks on ammonia and nitric acid will result in substantial carbon costs for European fertilizer producers relative to historical profit margins.

• The burden of additional carbon costs will affect the competitiveness of European fertilizer manufacture and will result in reduced ammonium nitrate production and plant closures. As a result, production will increase at plants outside the scope of ETS III which have spare AN capacity, especially in Russia, where there is higher carbon intensity of production and insufficient regulatory or commercial framework to prompt investment in abatement measures.

• IF European ammonium nitrate production is closed and farmers are supplied with ammonium nitrate produced in an external country such as Russia, then total emissions of greenhouse gases will increase and carbon leakage will occur.

• Non-Selective Catalytic Reduction (NSCR) is not considered to be BAT for N2O abatement in nitric acid production according to IPPC and therefore in principle cannot be installed in European fertilizer plants.

• Even if Fertilizers Europe’s proposed benchmarks for ammonia and nitric acid are adopted, carbon leakage is still likely to occur.

December 2010

Carbon leakage and the European fertilizer industry

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At the COMMISSION’S PROPOSED BENCHMARKS (1.612 tonnes CO2e for ammonia and 0.269 t CO2e for nitric acid) for ETS III, half of Europe’s p AN fertilizer p production will no longer g be competitive p with producers in key exporting countries This chart includes European AN PROFITABILITY FROM 1999-2007. Owing to the exceptional nature of agricultural and fertilizer markets in 2008 and the global economic crisis in 2008/09 we have not included 2008/9 profit data in this analysis. We feel this provides a more accurate view of AN market fundamentals.

Index 100 = Historical profit (1999-2007) 180 160

Carbon costs for p proposed p DG CLIMA benchmarks

140 120 100 80 60 40 20 0

Europe, 1st quartile

Europe, 2nd quartile

Europe, 3rd quartile

Europe, 4th quartile

Russia

Historical profits (1999-2007 year) Post-2012 profit/loss with ETS III cost ETS III cost (Carbon charge g at €30 and cost of abatement)

Note: This data set is based upon European ammonia production as the driver of both CO2 emissions and profitability.

We have differentiated the PROFITABILITY d data t for f AN BY EQUAL QUARTILES (derived from market prices – costs), and CARBON CHARGE AS FOUR EQUAL QUARTILES

Sources: Russian ammonia/nitric acid 1999-2007 plant specifics - Integer, Nitrogen Costs Study; Russian profitability 1999-2007 – Integer, FFI & FFB; European quartile plant data – PSI/ AC Fiduciaire; Integer & company annual reports; Abatement reduction factors and costs – Entec, N.serve, UNFCC and others.

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Carbon leakage and the European fertilizer industry

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At FERTILIZERS EUROPE’S PROPOSED BENCHMARKS (1.634 tonnes CO2 for ammonia and 0.385 t CO2e for nitric acid) for ETS III, carbon costs remain significant relative to historic profit margins and d carbon b lleakage k is a very llikely k l outcome This chart includes European AN PROFITABILITY FROM 1999-2007. Owing to the exceptional nature of agricultural and fertilizer markets in 2008 and the global economic crisis in 2008/09 we have not included 2008/9 profit data in this analysis. We feel this provides a more accurate view of AN market fundamentals.

Index 100 = Historical profit (1999-2007) 180 160

Carbon costs for proposed Fertilizers Europe benchmarks

140 120 100 80 60 40 20 0

Europe, 1st quartile

Europe, 2nd quartile

Europe, 3rd quartile

Europe, 4th quartile

Russia

Historical profits (1999-2007 year) Post-2012 profit/loss with ETS III cost ETS III cost (Carbon charge g at €30 and cost of abatement)

Note: This data set is based upon European ammonia production as the driver of both CO2 emissions and profitability.

We have differentiated the PROFITABILITY d data t for f AN BY EQUAL QUARTILES (derived from market prices – costs), and CARBON CHARGE AS FOUR EQUAL QUARTILES

Sources: Russian ammonia/nitric acid 1999-2007 plant specifics - Integer, Nitrogen Costs Study; Russian profitability 1999-2007 – Integer, FFI & FFB; European quartile plant data – PSI, Integer & company annual reports; Abatement reduction factors and costs – Entec, N.serve and UNFCC (see references)

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Carbon leakage and the European fertilizer industry

4

The Commission has concluded that Russia has 2 million tonnes of spare AN capacity. If up to 50% of European capacity is forced to close by ETS IIIrelated costs, and European markets are supplied by Russian producers, then at least 3.6 million tonnes of additional CO2e will be released every year 3.5

Projected emissions from ammonium nitrate production in 2013

Tonnes CO2e/tonne e AN

3.0 25 2.5

We do not anticipate that there will be any reduction of CO2e from Russian AN production in 2013 compared to present day emissions. emissions There is neither commercial nor regulatory incentives for the installation of N2O abatement in Russia.

+1.74 tCO2e/t AN 2.0 1.5 1.0 0.5 0.0 Europe, 1st Europe quartile

Europe, 2nd Europe quartile

Europe, 3rd Europe quartile

Europe, 4th Europe quartile

Russia

Note: Each European group is equal to ONE QUARTER OF EUROPEAN AMMONIA PLANTS. Sources: Russian ammonia/nitric acid 2009 plant specifics - Integer, Nitrogen Costs Study; 2007/8 European quartile plant data - PSI; Abatement reduction factors – Entec and N.serve (see reference slide)