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ETS reform

EU free emission allowances must focus on industries at highest risk An event at the European Parliament, organised by the Parliament Magazine and Fertilizers Europe, has warned of the high risk of carbon leakage for the fertilizer industry, reports Julie LevyAbegnoli

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n event at the European Parliament, organised by the Parliament Magazine and Fertilizers Europe, has warned of the high risk of carbon leakage for the fertilizer industry. MEP host Jørn Dohrmann welcomed attendees to the roundtable discussion, which included industry stakeholders as well as MEPs. He underlined that, “the emissions trading scheme (ETS) is the cornerstone policy in combating climate change. Today’s discussion uses the fertilizer industry as an example, but it’s not the only one that has problems.”

The EU ETS is due for reform, to better reflect the 2030 emissions reductions targets agreed upon by the member states last year. “Fertilizers are part of modern and efficient agriculture; without them, our farms would not stay competitive, so the fertilizer industry is a good place to start discussions on ETS”, said the Danish deputy, who is a member of Parliament’s environment committee as well as a substitute on the agriculture committee.

The first speaker on the panel was Marek Kaplucha, Vice-President of Fertilizers Europe, who told the audience that, “fertilizers account for 50 per cent of global food production; without them, we simply wouldn’t have enough food.” “It’s a very high-tech and capital-intense industry. We convert raw materials into fertilizers, and in this process, producing CO2 is unavoidable. We are aware of this, and it is our responsibility to take serious steps to reduce emissions,” he said.

“Over the last few years, our work to limit emissions has delivered considerable results, and we’re very proud of what we have done so far. But Marek Kaplucha of course, this isn’t the

final step we will take from our side.” “Two-thirds of our emissions are unavoidable. In terms of benchmarks, our suggestion is that they should reflect achievable technological progress – the one third of the emissions that we are able to reduce. We would like to see 100 per cent free allowances for this part of the process.” “The differentiation proposed by the Commission is welcome, but in our opinion does not go far enough. A correction factor of 0.2 per cent should be applied for those benchmarks where actual achievable emissions reductions are significantly below 0.5 per cent.”

Benchmarks are based on the emissions performance of the most efficient installations, and are used to determine the allo-

“Fertilizers account for 50 per cent of global food production; without them, we simply wouldn’t have enough food”

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news analysis

Free allowances and carbon leakage Going forward, a major threat for the effectiveness of the EU ETS is the potential relocation of investments and production to countries with less ambitious climate policies. This is known as carbon leakage, and while studies have suggested that, so far, no clear evidence of carbon leakage has been witnessed, the risk of leakage will increase substantially in future. This is due to the combination of two factors: first, much higher ETS prices and second, fewer free allowances available to compensate industries at risk of leakage.

Due to the underlying economics of different industries, the risk of leakage can differ significantly between them. Policymakers need to recognise that without sufficient compensation to the industries that are most at risk for carbon leakage – such as the fertilizer industry – carbon leakage will occur. In industries with homogenous products and relatively low transport costs, leakage will not be marginal, but considerable, when the cost of EU producers exceeds foreign producers’ costs of delivering to the EU. This is known as the ‘tipping point’. Until our trade partners adopt more ambitious climate policies, the EU should continue to fully compensate leakage-exposed industries.

It is also important to recognise that providing free allowances does not hamper the effectiveness of the ETS – quite the contrary. By maintaining leakage-exposed industries in the EU, global greenhouse gas emissions are reduced, and the ETS price will be higher, providing a stronger incentive to abate for the remaining ETS industries. And even if an industry received free allowances corresponding to 100 per cent of its emissions, it still has an incentive to abate and innovate, as it can sell the remaining allowances. The current over-supply of allowances in the system should be remedied, but does not provide an argument for not providing sufficient free allowances to leakage-exposed industries going forward.

Martin Bo Hansen is managing economist at Copenhagen Economics

cation of free allowances. Kaplucha added that, “any general adjustment allowances should not be uniform for all industries, but graduated, to allow sectors with the highest risk of carbon leakage to have their adjustments reduced, or even excluded.”

Carbon leakage can occur when the cost of complying with strict climate rules pushes businesses to transfer their production abroad, where climate control related costs are cheaper.

The Director-General of the European Commission’s DG climate action, Jos Delbeke, told those present that while the review of the current ETS was essential, “The ideas must come from industry. This is an open invitation to tell us what kind of technologies you would like to see encouraged.”

“The reallocation mechanism is generous but limited. The Commission believes we need to better focus on those industries that have the biggest problems. However, while this is a nice principle, it’s not easily done. Our proposal is now before Council and Parliament, and we are more than eager to work with all those involved.” “The current 54 benchmarks were

“The fertilizer industry is at substantial risk for carbon leakage”

set by 2007-2008 legislation and drawn up together with industry.

However, these were based on 2005, Martin Bo Hansen rather than 2015, technology. As we all know technology progresses each year, so we are now devising a system up to 2020.”

“In terms of carbon leakage”, said Delbeke, “we have a list of 150 sectors. This is a sizeable number, especially as we originally had a list of five or ten sectors in mind, and with ten sectors you can reach the majority of those with serious issues.”

“We propose shortening the list to 50 sectors. However we should go further, because even within these sectors, some can handle the problem more easily than others,”” he suggested.

Following Delbeke’s presentation, the panel took a break to hear from MEPs in the audience, including Parliament’s newly appointed ETS rapporteur Ian Duncan. The ECR deputy said, “Now is an important time. It will be absolutely crucial to meet with the people in this room and so many others with fears and concerns, but who are also ready to make a change.

I am ready to listen.”

However, UKIP MEP Roger Helmer was wary of the ETS system, insisting that, “we have a series of intervention mechanisms – benchmarks, the allocation of free allowances, and funding programmes. The level of regulatory intervention in markets is such that we have to question whether we even have a free market capital economy anymore. This is extremely dangerous and worrying.” His colleague Stuart Agnew prom19 October 2015 PARLIAMENTMAGAZINE 17

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ETS reform

ised that, “Roger and I will do our best to delay this ludicrous project as long as we possibly can.” EPP group member Peter Jahr told attendees, “I hope industry will bring forth a proposal for compromise.

This must be a realistic proposal that we can take on board - we need a change in Jos Delbeke real life, not just in statistics.”

The panel presentations then resumed, with Ecofys consultant Michiel Stork highlighting that when it comes to producing fertilizers, “the current technology in Europe is almost exclusively based on gas”. Ammonia is a key element in the production of fertilizers, and is responsible for most of the process’s greenhouse gas emissions.

However, Stork insisted that, “ammonia production in Europe is energy-efficient. Some improvements can be made to the ammonia process, but it’s not going to lead to drastic decarbonisation.” “Can we make hydrogen-based power? Hydrogen

“The Commission believes we need to better focus on those industries that have the biggest problems”

Fostering a competitive European industry This summer, the European Commission presented the first legislative step in delivering on the EU’s 2030 climate and energy commitments, with its proposal to revise the EU emissions trading system (ETS). The revision of the EU ETS for the period from 2021 to 2030 includes three key elements: an increase in the pace of emissions cuts; prolonged and more focused provisions against the risk of carbon leakage; and a funding boost for energy-sector modernisation and low-carbon innovation, including in the manufacturing industry.

The competitiveness of European industry has been an important issue for the ETS since it was launched 10 years ago. The measures in place include, in particular, the free allocation of emission permits to sectors at risk of carbon leakage, which may occur if production is transferred to countries with less ambitious climate policies. Several reports have confirmed that so far this has not happened. The Commission will continue to closely monitor this aspect.

The free allocation of emission allowances will continue in the next phase of the ETS. Due to the decreasing number of allowances, the proposed new rules will better target the sectors most exposed to the risk of carbon leakage.

Special rules to allow new and growing installations to receive allowances will also be improved.

Moreover, the Commission has proposed to introduce several support mechanisms to help industry meet the innovation and investment challenges of the low-carbon transition. These include a significant innovation fund financed from ETS allowances for the demonstration of innovative breakthrough technologies in industry.

All sectors have a role to play in contributing to the low-carbon economy, and the fertilizer industry has already shown it can deliver. Emissions of one of its key products, nitric acid, have been reduced considerably over the past years thanks to technological progress. Innovation is the way for European industry to continue flourishing in future.

Jos Delbeke is Director-General of the European Commission’s DG Climate Action

“Ammonia production in Europe is energy-efficient. Some improvements can be made to the ammonia process, but it’s not going to lead to drastic decarbonisation” Michiel Stork

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news analysis

The road to Paris

“The emissions trading scheme (ETS) is the cornerstone policy in combating climate change” Jørn Dohrmann basically contains all the energy – can we feed that into the ammonia? This could be attractive, but in general, power prices are predicted to be much too high to be attractive.” He also noted that, “nitrous oxide emissions have decreased steeply over the last 10 years. Further improvements are foreseen, but the main Energy efficient fertilizers Over the past 11 years, emissions from the manufacture of nitric acid have gone down 87 per cent, and they are projected to decrease further. Europe is where ammonia production is the most energy-efficient. Some improvements to existing plants are possible, but with limited effects. If new plants were built, their energy efficiency could improve, but, again, to a limited extent, as most of the gas is necessary to form the product, regardless of the process that is used.

Using renewable power as a source of energy when it is abundantly available (for example, when there is strong wind) and therefore cheap could further reduce CO2 emissions in ammonia production. Also, carbon capture at storage or utilisation has the potential to significantly decarbonise ammonia production, but this depends on a number of factors, such as the business case and transport network.

There are more emissions from the use of fertilizers than their manufacturing.

Therefore, it is important to optimise the use of these productions, by providing information, or optimising their efficiency through tailor-made fertilizers, mapping soil needs or using inhibitors, for example.

Michiel Stork is a senior consultant at Ecofys

It was truly overwhelming to see so many participants for the breakfast roundtable focusing on how the EU should balance its revised emissions trading scheme (ETS), without putting too much pressure on agriculture and related industries.

As was evidenced by the turnout, this is a very important discussion ahead of December’s long-awaited climate summit in Paris. World leaders will attempt to come up with a global climate agreement. During these negotiations, the EU will be one of the key actors, with one of the more ambitious approaches in hopes of finding a sustainable action plan for our climate. Still, it is crucial for the EU, in its efforts to reach an agreement, not to forget its citizens and industries, who are contributing to European wealth – including agriculture and the fertilizer industry. The EU must not undermine its own companies.

improvements have already been made.”

For example, during the event, we learned that the fertilizer industry is The last speaker much cleaner and emits far less CO2 than its comparable industries on other continents. When the EU commits itself to an international climate agreement, on the panel was that agreement must be ambitious for everyone, not just the EU. Otherwise, Martin Bo Hansen, Europe risks experience a distortion of competition, with far more climatemanaging econodamaging fertilizers finding their way onto our markets, jeopardising European mist at Copenhagen jobs and profits. Granted, this is no easy task. However, this must be the aim of Economics.

He the negotiations. warned that, “the I would like to thank the European Commission for its participation in the breakfast meeting. It is reassuring to see attention being paid to the arguments fertilizer industry is and concerns shared by MEPs, industry and European citizens. at substantial risk for Jørn Dohrmann (ECR, DK) is a member of Parliament’s environment, carbon leakage. It has public health and food safety committee already achieved significant greenhouse gas emissions reductions, exhausting almost all possibilities for technological improvement.” He added that, “increased carbon costs will reduce the industry’s return on capital far beyond sustainable levels. The fertilizer industry is already very close to the tipping point.”

Bo Hansen also said, “going forward, free allowances should be more focused on industries at highest risk of carbon leakage, but this is not reflected in the current ETS proposal. Instead of simply spreading a fixed portion of allowances thinly across industries, the focus should be on industries where these allowances matter.”

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