EU ETS reform: Emission allowances must focus on industries at highest risk

European Commission aiming to reduce list of sectors believed to be most exposed to carbon leakage.

By Julie Levy-Abegnoli

08 Oct 2015

An event at the European Parliament, organised by the Parliament Magazines and Fertilizers Europe, has warned of the high risk of carbon leakage for the fertilizer industry.

MEP host Jørn Dohrmann welcomed attendees to the roundtable discussion, which included industry stakeholders as well as MEPs. He underlined that, "the emissions trading scheme (ETS) is the cornerstone policy in combating climate change. Today's discussion uses the fertilizer industry as an example, but it's not the only one that has problems."

The EU ETS is due for reform, to better reflect the 2030 emissions reductions targets agreed upon by the member states last year.


"Fertilizers are part of modern and efficient agriculture; without them, our farms would not stay competitive, so the fertilizer industry is a good place to start discussions on ETS", said the Danish deputy, who is a member of Parliament's environment committee as well as a substitute on the agriculture committee.

The first speaker on the panel was Marek Kaplucha, Vice-President of Fertilizers Europe, who told the audience that, "fertilizers account for 50 per cent of global food production; without them, we simply wouldn't have enough food."

"It's a very high-tech and capital-intense industry. We convert raw materials into fertilizers, and in this process, producing CO2 is unavoidable. We are aware of this, and it is our responsibility to take serious steps to reduce emissions," he said.

"Over the last few years, our work to limit emissions has delivered considerable results, and we're very proud of what we have done so far. But of course, this isn't the final step we will take from our side."

"Two-thirds of our emissions are unavoidable. In terms of benchmarks, our suggestion is that they should reflect achievable technological progress - the one third of the emissions that we are able to reduce. We would like to see 100 per cent free allowances for this part of the process."

"The differentiation proposed by the Commission is welcome, but in our opinion does not go far enough. A correction factor of 0.2 per cent should be applied for those benchmarks where actual achievable emissions reductions are significantly below 0.5 per cent."

Benchmarks are based on the emissions performance of the most efficient installations, and are used to determine the allocation of free allowances.

Kaplucha added that, "any general adjustment allowances should not be uniform for all industries, but graduated, to allow sectors with the highest risk of carbon leakage to have their adjustments reduced, or even excluded."

Carbon leakage can occur when the cost of complying with strict climate rules pushes businesses to transfer their production abroad, where climate control related costs are cheaper.

The Director-General of the European Commission's DG climate action, Jos Delbeke, told those present that while the review of the current ETS was essential, "The ideas must come from industry. This is an open invitation to tell us what kind of technologies you would like to see encouraged."

"The reallocation mechanism is generous but limited. The Commission believes we need to better focus on those industries that have the biggest problems. However, while this is a nice principle, it's not easily done. Our proposal is now before Council and Parliament, and we are more than eager to work with all those involved."

"The current 54 benchmarks were set by 2007-2008 legislation and drawn up together with industry. However, these were based on 2005, rather than 2015, technology. As we all know technology progresses each year, so we are now devising a system up to 2020."

"In terms of carbon leakage", said Delbeke, "we have a list of 150 sectors. This is a sizeable number, especially as we originally had a list of five or ten sectors in mind, and with ten sectors you can reach the majority of those with serious issues."

"We propose shortening the list to 50 sectors. However we should go further, because even within these sectors, some can handle the problem more easily than others," he suggested.

Following Delbeke's presentation, the panel took a break to hear from MEPs in the audience, including parliament's newly appointed ETS rapporteur Ian Duncan. 

The ECR deputy said, "Now is an important time. It will be absolutely crucial to meet with the people in this room and so many others with fears and concerns, but who are also ready to make a change. I am ready to listen."

However, UKIP MEP Roger Helmer was wary of the ETS system, insisting that, "we have a series of intervention mechanisms - benchmarks, the allocation of free allowances, and funding programmes. The level of regulatory intervention in markets is such that we have to question whether we even have a free market capital economy anymore. This is extremely dangerous and worrying."

His colleague Stuart Agnew promised that, "Roger and I will do our best to delay this ludicrous project as long as we possibly can."

EPP group member Peter Jahr told attendees, "I hope industry will bring forth a proposal for compromise. This must be a realistic proposal that we can take on board - we need a change in real life, not just in statistics."

The panel presentations then resumed, with Ecofys consultant Michiel Stork highlighting that when it comes to producing fertilizers, "the current technology in Europe is almost exclusively based on gas". Ammonia is a key element in the production of fertilizers, and is responsible for most of the process's greenhouse gas emissions.”

However, Stork insisted that, "ammonia production in Europe is energy-efficient. Some improvements can be made to the ammonia process, but it's not going to lead to drastic decarbonisation."

"Can we make hydrogen-based power? Hydrogen basically contains all the energy - can we feed that into the ammonia? This could be attractive, but in general, power prices are predicted to be much too high to be attractive."

He also noted that, "nitrous oxide emissions have decreased steeply over the last 10 years. Further improvements are foreseen, but the main improvements have already been made."

The last speaker on the panel was Martin Bo Hansen, managing economist at Copenhagen Economics. He warned that, "the fertilizer industry is at substantial risk for carbon leakage. It has already achieved significant greenhouse gas emissions reductions, exhausting almost all possibilities for technological improvement."

He added that, "increased carbon costs will reduce the industry's return on capital far beyond sustainable levels. The fertilizer industry is already very close to the tipping point."

Bo Hansen added that, "going forward, free allowances should be more focused on industries at highest risk of carbon leakage, but this is not reflected in the current ETS proposal. Instead of simply spreading a fixed portion of allowances thinly across industries, the focus should be on industries where these allowances matter."


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