FuelsEurope supports the EU ETS as the EU’s ‘flagship instrument’ within its energy and climate policy framework, as a cost-effective market mechanism for emissions reduction in the power and industry sector.
FuelsEurope fully supports the conclusions of the EU Council of October 2014 where the key needs and principles for EU ETS reform were set out: it was stated that the most efficient installations should not face undue carbon costs and that free allocations should take into account both direct and indirect carbon costs. FuelsEurope also welcomes the focus of the Commission in its proposals for amending the ETS Directive on carbon leakage protection and the recognition of the key role of Energy Intensive Industries in the European economy.
However, FuelsEurope’s assessment is that the current proposals are not in line with the EU Council conclusions and that within carbon leakage sectors even the most efficient facilities (those at the benchmark level) could face a 10 to 20% shortage on their free allocation by the end of Phase IV.
FuelsEurope estimates that Refining would face a total cost of approximately 15 Billion € over Phase IV (with a CO2 price of 30 €), including indirect costs. This represents more than 10% of average refinery margins which are already eroded by other legislation in the field of air and fuel quality.
Carbon leakage protection is needed to preserve the competitiveness of our industry from international competitors that do not face similar carbon cost. However, such protection does not decrease the incentive for continuous improvement of industry’s carbon efficiency.
The EU refining industry is an important contributor to the EU economy and security of supply.
In view of its international exposure, it should continue to receive full carbon leakage protection against both direct and indirect costs at the level of realistic benchmarks and based on actual activity levels, without a correction factor.
FuelsEurope therefore believes that the following changes should be made during the legislative process:
- In line with the October 2014 EU Council conclusions, best performers in exposed sectors must receive 100% free allocation at the benchmark level. This requires a fair share of the ETS cap for industry free allowances and no correction factor applied to free allocation. FuelsEurope estimates that the auctioning share for the IVth trading period fixed at 57% in the Commission proposal has been over-estimated by up to 7% and that the 400 million allowances used for the Innovation Fund should also be taken from the auctioning share;
- To establish an activity-based allocation mechanism using recent annual activity levels; such an activity-based allocation mechanism will both protect sectors against carbon leakage, serve to not discourage growth (and having to surrender extra allowances) and reduce the potential for an operator to generate windfall profits by cutting production, whilst retaining their full allocation of free allowances;
- Fair benchmarks to be recalculated once before the start of the IVth trading period and remain valid throughout Phase IV. The revised benchmarks should be based on actual verified performance over a representative period (2013-2017) instead of applying an arbitrary flat-rate reduction to the benchmark;
- Benchmark installations have to be representative for the sectors; the benchmark of all industrial sectors with a “steep” benchmark curve, including Refining, must be expanded from current top 10% to include the top 25% to better describe the activities of these sectors;
- To install an EU-wide harmonised system of financial compensation for indirect emission costs in order to remedy the current distortions to the internal market due to national compensation schemes; to add EU Refining to the list of sectors eligible for compensation in view of its electro-intensity, as these indirect emission costs add to its cost disadvantage vs. international competition;
- To define within the Directive the “technical details” that are key to calculating allowances for all sectors (e.g. reference years for activity levels, elaboration of the benchmarks…). Leaving the definition of these details to delegated or implementing acts significantly reduces investor certainty as these acts are unlikely to be adopted before 2018, leaving very little time to prepare for Phase IV;
- To maintain the possibility to surrender international offsets, where these offer real sustainable emission reductions and are subject to robust monitoring, reporting and verification protocols. This would promote global participation and achieve the lowest cost of carbon abatement.
FuelsEurope believes that an activity-based approach combined with benchmark updates before the beginning of Phase IV will exclude the possibility for windfall profits, whilst ensuring sufficient protection to exposed sectors.
FuelsEurope welcomes the European Council request that administrative complexity should not be increased and believes that this guidance should be a driving principle for revising the ETS Directive.