EUROFER position on Emission Trading Scheme - April 2008

EUROFER position on the Commission proposal for the revision of the EU Emissions Trading System (EU-ETS)1Proposal for a Directive of the European Parliament and the Council amending Directive 2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading system of the Community (COM(2008) 16 final)

The European steel industry’s situation with regard to Climate Change policies is characterised by

• a history of achieved CO2 reductions both expressed per tonne of products and absolute2The European Environment Agency calculates for the EU 27 steel industry a reduction of 21 % in 2005 compared to 1990 levels ,
• operating at the technological limits of the currently available production processes,
• commitment to research into breakthrough technologies,
• exposure to fierce international competition.

In response to the EU’s Climate Change commitments and with view to the above described conditions, EUROFER calls for a Climate Change policy which

• has the ultimate goal of implementing a global CO2 price which provides for equal conditions for competing industries,
• meanwhile, by promoting best performance, maximises industrial CO2 mitigation effects within the EU whilst avoiding carbon leakage,
• strengthens financing of research.

To realise the above, EUROFER deems it appropriate to include criteria on the avoidance of competition distortion into any International Agreement, to support Global Sectoral Agreements as an additional driver towards an International Agreement or as one of its building blocks, to base allocation of EU-ETS-allowances on “benchmarking” until an International Agreement as described above comes into force, to consider carbon equalisation measures for cases of carbon leakage not addressed by benchmarking, and to provide for substantial support by the Community and the Member States for industry research activities.

The research project of the steel industry with the highest profile in terms of reducing carbon use in steelmaking is the ULCOS-project. It attempts to achieve clarity on the technical feasibility of certain breakthrough-technologies and their combination with capture and storage between 2015 and 2020. The steel industry’s activities are also pursued for the development of steel applications, which offer CO2 mitigation potentials for example for energy efficient housing, higher efficiency for electricity generation, sea-borne wind power stations, submerged hydro-electricity, lightweight vehicles or more energy efficient electricity transformation.

The European steel industry is committed to contribute to the EU’s objective to reduce greenhouse gas emissions (GHG) by 20% in 2020 compared with 1990 and by 30% provided that other countries commit to comparable efforts in the framework of a global agreement.

In pursuing this path towards a low-carbon economy, EUROFER recalls3Presidency Conclusions, Brussels European council, 13/14 March 2008, doc 7652/08 the need to be consistent with “EU sustainable development, competitiveness, security of supply”, the “need for sustainable growth” and “the risk of carbon leakage in certain sectors”.The Commission referred to the need to “achieve high environmental performance and energy efficiency without losing competitiveness”4Communication on the Competitiveness of the Metals Industries (SEC(2008)246).

In line with the general position of EUROFER on Climate Change politics as described above and the recommendations of Council and Commission, EUROFER welcomes the proposal for a reviewed EU-ETS Directive but identifies the need for amendments to introduce necessary fine-tuning, clarity and legal security.

Without such corrections, the EU-ETS proposal could give rise to scenarios comprising a share of around 50 % auctioning for steel making in 2013, the threat of a full-auctioning regime, the possibility of a CO2 reduction obligation of about 40 to 50 % in 2020 compared to 1990, full penetration of the home market by non-EU competitors, disincentives for steel recycling, a total ban on growth resulting in correlated carbon leakage and a discount of early action.

This uncertainty has a substantial impact on the investment strategies of EU steel industry.EUROFER therefore calls upon Council, Parliament and Commission to introduce the adequate provisions in order to

• ensure a fair balance between climate change measures and the competitiveness of EU industry,
• allow the steel sector to remain internationally competitive through the continued allocation of free allowances as long as no international or global sectoral agreement which provide for equal footing of industrial competitors are in place,
• secure sustainable investment and high quality jobs in the European steel industry to maintain the European union as a region with a strong industrial backbone in which the steel industry remains a driver of technological innovation.

Main suggestions for strengthening the Commission proposal for the revision of the EU Emissions Trading System (EU-ETS)

The general guideline for improving the proposal should be a balanced recognition of social, economic and environmental aspects to secure progress towards the climate stabilisation whilst attaining a high level of employment, high social standards and the well-being of European citizens.

Improvements to avoid carbon leakage as transitional measures before an International Agreement is in force:

• Immediate integration of a list of sectors at risk of carbon leakage in the text of the EU-ETS Directive. Any prolonged uncertainty threatens investment.
• The determining allocation method should use fair sector-specific benchmarks based on the polluter-pays principle.
• For installations identified as being at risk of carbon leakage, allowances as defined by benchmarks and production should be 100 % free
• Compensation for pass-through of CO2-costs in electricity for electricity intensive activities at risk of carbon leakage, without increasing the burden of other energy intensive industries. This is vital, especially for the electricity-based recycling of steel.
• Both the “new entrants” definition and the benchmarking methodology should allow for sustainable growth.
• Auctioning is neither proportional nor efficient for any manufacturing industry. Its introduction must therefore be made with utmost caution by limiting its extent, provide for long-term transition and thorough evaluation of resulting economic effects.

Improvements for international aspects

• An International Agreement must be designed to allow the integration of any emerging Global Sectoral Agreements. For both, the EU-ETS Directive must contain criteria, which guarantee a level playing field for industrial competitors, including a binding dispute settlement regime.
• A regime conform with WTO principles should be available putting Community and Third Country installations on a comparable footing both on the EU and international markets, directed to situations where the new EU-ETS would effectively impose costs to the EU steel industry which third country competitors would not have to bear (e.g. “carbon equalization system”, adjustment of preferential tariff agreements).

Improvements to remove inconsistencies and unequal treatment

• The sustainable use of co-generation gases (e.g. for heat and electricity production), which are an unavoidable product of primary steel making, must not be subjected to auctioning.
• Readjusting theburden sharing between the EU-ETS-sector and the non-EU-ETS-sector, based on evaluation of economic, social and environmental impacts.
• The exclusion-provision for small emitters should not be confined to combustion installations, refer to emissions only and use a threshold of up to 50 000 t CO2 instead of 10 000 t CO2

Improvements to foster technology development

• CDM projects need a wider recognition, because CDM is a functional instrument for technology transfer, which can contribute substantially to the global mitigation efforts.
• More pronounced support for research can be introduced by providing for a larger share of auctioning revenues and an extension of possible recipients.