Climate change – updating the EU emissions trading system (ETS), public consultation

News | 2021-02-05

The EU is heading towards climate neutrality by 2050. Finland is setting more ambitious targets and is aiming at climate neutrality by 2035. Within the context of Finland’s target, the chemical industry in Finland announced its ambition towards climate neutrality already in early 2019, before the government set its targets. In June 2020 the chemical industry published a study that sets the pathway to large greenhouse gas reductions and climate neutrality.

In the Finnish chemical industry climate neutrality roadmap, greenhouse gas emission reductions are taken into consideration from three different angles, reduction from processes (scope 1), energy use (scope 2) and raw materials (scope 3). When looking at the solutions towards climate neutrality, a large toolbox of different technologies has been identified.

The EU Emissions Trading System (EU ETS) is the most important tool for the EU to reduce greenhouse gas emissions. During the past years, the EU ETS has put an increasing amount of pressure towards minimizing climate warming emissions, especially characterized by a sharply increasing price on emissions. There are three main sectors in the EU ETS, the energy industry, the energy intensive industry and aviation, that has a separate system. The dynamics of these three different sectors are quite different from each other. Emission reductions for the locally competing energy sector have become more lucrative during the past years, since major technologies, like renewable energy (solar and wind), has become feasible, or even the best choice on the market. The energy sector is experiencing a never-before-seen development towards low emission technologies, and in some countries almost completely emission free electricity grids are emerging. The decarbonizing of heating is however still a major challenge.

For the energy intensive industry, such as the chemical industry, the challenges are major. The industry is in a tough position, under attack from all sides with increasing electricity prices and a global competition with product prices. Price competitiveness has been a major concern and thus, mechanisms for carbon leakage has been developed to safeguard the European industry. The free allocation in the EU ETS has been crucial for the European industrial competitiveness. But the increasing climate ambitions are changing the dynamics of the current system.

When moving towards more ambitious climate policy, the EU energy intensive industry competitiveness should be of highest priority. A decreasing emissions cap by a steeper linear reduction factor, ever more demanding benchmarks, an energy industry embedding its climate investments in the electricity price and the lack of market-based technologies to massively reduce emissions, is raising questions about the future competitiveness of the chemical industry in the EU. How do we secure the global competition for our energy intensive industry?

There are four crucial questions regarding the energy-intensive industry and the EU ETS:

  1. The reducing cap and the increasing EU ETS price and the impact of these on the level of free allocation

The new higher climate ambition of the European Commission has already had a significant impact on the EU ETS price. According to many forecasts, the price will increase to 50€/ton by 2025 and to 80€/ton by 2030. This means, that the energy intensive industry will have to choose, before 2030, between risky and large investments into young unproven technology that is costly to operate or paying a high price for the emissions. Without solid measures, carbon leakage will further increase as a major risk. The free allocation should not be directly linked to the decreasing cap. It should stay on a high enough level for the energy intensive industry to stay globally competitive. Additionally, an EU wide indirect cost compensation scheme should be introduced to minimize the risk of carbon leakage.

The covid19 pandemic has shown that the EU ETS should be more flexible in times of crisis and unusual market stability. Introducing a force majeure clause to avoid undue impact of external events, such as the COVID pandemic, on free allocation is well motivated. Production reductions related to the COVID-19 outbreak should not lead to undue reduction of post-2020 free allocation.

  1. The inclusion of other sectors into the EU ETS, and their ability to pass through emission costs to the energy intensive industry

If new sectors are included in the EU ETS, the impact on the energy intensive industry should be taken into consideration. At present, the energy sector is passing-on its EU ETS costs in the electricity price to the energy intensive industry. When sectors like maritime and road transport, that provide services to the industry, would be included in the EU ETS, the risk is, that their costs will also be passed-on to their customers, the industry. Putting more pressure on the energy intensive industry, that already at present is in fierce global price competition, would increase the risk for carbon leakage.

In case of maritime transport, it should be taken into consideration how different EU countries are dependent on maritime transports. Increasing the cost of maritime transport will have a significant impact on a few countries in the EU, thus further decreasing competitiveness for these countries on the European single market. A comprehensive study should be made to understand the different impacts on the level-playing field between Member States in the EU and concrete measures should be taken to secure competitiveness of those most impacted.

  1. Technological and investment readiness of the energy intensive industry to invest in new low-emission technologies

Most of the technologies that will bring large GHG emission cuts to the energy intensive industry, are according to several estimates, market-based at the earliest around 2030 (source: https://kemianteollisuus.studio.crasman.fi/file/dl/i/0GtI_g/kBevzvIQojOC9zfO-Ztyug/Kemianteollisuusroadmap.pdf). To speed up the maturity of these technologies, massive scale-up projects will be needed. These new low-emission facilities require large CAPEX investments and their OPEX costs are high for many years after the investment. The EU ETS should secure enough investments into these first-of-a-kind projects in the energy intensive industry. The Innovation Fund should be expanded, and unused emission allowances sold by the Member States, could be used to fund large projects. Mechanisms to secure the cost-effective operation of new state-of-the-art facilities should also be introduced, like the Carbon Contracts for Difference. The challenge is not only investing in new technology, it is also operating that technology before it becomes competitive on the market.

 

  1. The overlap between Carbon Border Adjustments (CBAM) and the EU ETS and the ability of the mechanisms within these to prevent carbon leakage

When planning the new EU ETS, it should be done by taking into consideration the carbon border adjustment mechanism and possible overlaps and synergies between these. Preventing carbon leakage becomes more difficult with rising EU ETS prices, and thus it will require the synchronization of several mechanisms. With carbon border adjustments the focus should be on creating a level playing field on the European market between imported products and domestic products, but also level the playing field globally by introducing an export mechanism. The increasing price of the EU ETS will impact the global competitiveness of the European energy intensive industry and thus increase the risk of carbon leakage.

The EU ETS is one of the most important mechanisms to secure that the EU is moving in the right direction towards climate neutrality. It takes investments and time to transform the economy in a more sustainable direction. We should remember that we are not alone in this world, our companies face global competition and we need to assure, that we do not loose important value chains during our journey towards climate neutrality. Securing the competitiveness of our energy intensive industry is of outmost importance. The emission reductions in the EU can be made on every sector, but it should be taken into consideration that the price, technological maturity and dynamics of the sectors are different. That is why the policy measures and the impact of those should always be well researched. The EU ETS is not always the right answer, especially not incorporating different sectors with different dynamics into the same system. The regional differences should also be taken into consideration. Cherry picking sectors to reach the ambitious targets, and putting unfair emphasis on certain sectors, could distort the single market. What is important to consider is also the flexibility of the planned policy mechanisms. If there is a global crisis, there should be room to adjust accordingly and preserve the global competitiveness of the EU and its industry.

Respectfully,
The Chemical Industry Federation of Finland (CIFF)
Rasmus Pinomaa
Senior Advisor, Climate & Energy

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