German heavy energy users to be exempt from ETS costs

The UK Government is currently consulting on its proposals for compensating heavy industry from costs incurred by Contracts for Difference.

Energy-intensive industries such as steel and cement makers in Germany will be compensated for higher electricity costs due to the EU Emissions Trading Scheme (ETS), following a decision by the European Commission yesterday.

The decision paves the way for similar one on state aid proposed by the Treasury for costs generated by Contracts for Difference under Electricity Market Reform proposals.

Heavy energy users have been lobbying furiously for such support in order to prevent what is called 'carbon leakage', or the transfer of the same industrial activities to less regulated parts of the world as a result of the higher costs of operating in Europe due to the ETS.

A statement from the European Commission said: "The Commission's investigation found that the scheme... would effectively prevent carbon leakage while keeping competition distortions to a minimum".

A proposal for a separate €40 million compensation scheme for non-ferrous metal producers in Germany, which that nation introduced unilaterally in 2009, was rejected by the EU executive.

It argued that the German government had not provided sufficient evidence to support a case that carbon leakage had occurred and that "would favour very selectively only eleven German beneficiaries to the detriment of competitors in the internal market".

The approved scheme is back-dateable to January 2013 and also relates to support offered in Germany.

The Commission's investigation found that the scheme, "in applying the harmonised methodology of the ETS guidelines, would effectively prevent carbon leakage while keeping competition distortions to a minimum".

In May 2012, the Commission adopted guidelines on how Member States can support industry in the context of the Emissions Trading Scheme (ETS).

British proposals for a similar scheme to exempt energy-intensive industries from the costs of Contracts for Difference (CfD) are contained in an amendment to the EMR bill, currently out for consultation.

Under this Government-regulated scheme, energy suppliers would not add the costs of CfDs to the charges made for the supply of electricity to high energy users, and has been constructed using five principles. It would:

be targeted at companies that are both electricity intensive and trade intensive

minimise distortions within the UK economy;

avoid perverse incentives, e.g. discouraging take-up of energy efficiency measures;

minimise the administrative burden for all parties;

minimise the costs to consumers outside of the scope of the exemption (both business and household) whilst meeting the policy objective.

The Government has already set out the eligibility for compensation from the indirect costs of the EU Emissions Trading Scheme (EU ETS), based on European Commission guidelines.

It is also lobbying Brussels for urgent structural reform of the ETS, arguing that the best way to address carbon leakage would be an ambitious international climate agreement. This would create a level playing field for industry inside and outside the EU.

However, the Government meanwhile supports the allocation of free allowances under the ETS, in the absence of a global climate agreement, as it "gives relief to sectors at significant risk of direct carbon leakage, without raising barriers to international trade".

Image from thinkstock

Caption: The Government is currently consulting on its proposals for compensating heavy industry from costs incurred by Contracts for Difference.

Emission allowance auction to be held as price crashes

The second auction in Phase II of the European Union's Emissions Trading System will be held on behalf of the government on 24th March.

But the scheme has come under attack again, as the owners of registered installations - large energy generators, cement manufacturers, chemical plants and the like - have been selling off credits which they are not using on account of the recession - to the tune of 75 to 150 million euros a day - to raise funds to balance their books.

Big polluters must purchase allowances corresponding to the tonnes of carbon they expect to emit. 7% of the UK's allowance cap is auctioned - about 86 million allowances over Phase II.

West European iron and steel output is expected to fall by at least 14% this year compared to 2008, and EU cement production by 20-25%, meaning there will be a surplus of carbon allowances of 66 million tons for those two sectors alone. This is worth about 750 million euros. But the sell-off is causing a glut and a price collapse - by up to a third in January. Analysts said it could drop as low as 5 euros from a peak of 31 euros last summer.

"This was not designed as a scheme to give corporates cheap short-term funding options in a credit crunch meltdown," said Mark Lewis, Deutsche Bank carbon analyst. "But that appears to be what's happening."

A low price undermines incentives for companies to cut emissions. "It demonstrates that the targets after 2012 (to 2020) are too lax, especially in combination with a large use of carbon offsets," said Cambridge University's Karsten Neuhoff. But Barbara Helfferich, EU Commission environment spokeswoman brushed off criticism, saying "If those companies were smart they would take those profits and invest them in greener technology". But will they?

The allowances are one of the worst investments so far in 2009, falling more than almost any other energy commodity or index of global stocks. Only the energy guzzlers have benefited - so it looks as if this auction won't raise nearly as much cash for the government as the first one.

This is yet another reason why the ETS needs a complete overhaul - it is just not fit for purpose.

Legal challenge to ETS mooted

In the first phase of the EU's Emissions Trading System, permits to burn fossil fuels were given away to 5,000 of the EU's biggest polluters.

At one point, the price of permits rose to €27 per tonne, making the whole distribution worth €177 billion.

This inflated their profits and enabled them to out-compete cleaner, less energy-hungry firms. It also encouraged them to lobby in the manner described in Dire Threat to EU renewables.

If, instead, the emissions permits had been given to every EU resident, we could each have been better off by up to €280 a year.

Some campaigners are currently considering whetehr to mount a legal objection to this, on the grounds that the energy companies operated as a cartel, and that the emissions were part of 'the commons' belonging to all EU citizens, who had effectively paid for it through their energy bills.

Although it's a case of bolting the stable door after the horse has run off, the point of the challenge would be to raise awareness of the rip-off and challenge the companies' hegemony.

The only two policies that have a chance to see us through the climate change crisis are not the ETS or carbon capture and storage, but feed-in tarriffs and cap-and-share (or TEQs).