The ETS reform proposal falls short of effectively protecting EU refineries against carbon leakage

Posted on 15/07/2015 in Press Release

FuelsEurope welcomes the focus of the Commission on carbon leakage protection and the recognition of the key role of Energy Intensive Industries in the European economy. However, ETS proposals fail to provide sufficient structural improvements to current carbon leakage provisions. As a result of insufficient free allocation since the beginning of Phase III the EU Refining industry is already partly exposed to the risk of carbon leakage. The sector therefore urgently needs fair, effective and simple solutions to the issue of carbon leakage after 2020. Unfortunately, current flaws in the system which remain unaddressed will lead following FuelsEurope’s preliminary assessment to an additional cost of about 10 Billion € for European refineries over Phase IV.

On the 9th of July, FuelsEurope, together with other Energy Intensive Industries, called on the Commission to apply the following principles for free allocation rules in the upcoming EU ETS revision:

Preserve the competitiveness of best performers who should receive full protection from direct and indirect costs, thereby incentivising other installations. However in the Commission proposals free allocation would still be capped and a uniform correction factor that would penalise all refining installations independently of their performance, is maintained. Most competitors to EU Refineries do not face any comparable carbon cost today. The EU’s refining industry is therefore still exposed to the threat of carbon leakage.

Support growth by synchronising free allocation with current/real levels of production. This approach would have allowed solving the current mismatch between free allocation and the industry’s needs. It remains unclear whether this point has been addressed effectively by the Commission.

Base the rules on technically and economically achievable benchmarks, reflecting the actual performance of the industry. The Refining industry already has a very stringent benchmark and the 1% yearly improvement factor, which is disconnected from any industrial reality, would penalise them even further.

Address the negative impact of the EU ETS on electricity prices, which are putting European energy-intensive industries at a disadvantage compared to global competitors. The lack of a harmonised EU-wide approach in the Commission proposal will leave EU Refineries – for whom indirect costs currently represent almost 30% of total ETS costs – unprotected vis-à-vis global competitors benefiting from much lower energy prices.

John Cooper, Director General FuelsEurope, stated: “Based on today’s Commission proposals, even assuming realistic improvements in refineries’ carbon efficiency, our industry would face a deficit of free allocation approaching 350Mt over Phase IV. With a CO2 price of 30€, this would lead to a cost of approximately 10 Billion €. This amounts to an additional 0.23€ per barrel on top of existing costs for EU regulatory compliance, which are already very significantly eroding EU refining net margins”.

Cooper added: “Since oil products are traded globally, the Refining industry would not be able to pass through these carbon costs without ultimately losing market shares”.

FuelsEurope, therefore, urges the Council and the Parliament to amend Commission proposals in order to ensure that the Refining industry, which is key to European value chains, competitiveness and security of supply, can benefit from adequate protection.