Fixing ETS indirect costs: Why a smart hybrid model is the best solution

MEPs have a golden opportunity to fix ETS indirect carbon costs compensation, but achieving their ambition will require that they go the extra mile, write Guy Thiran and Gerd Götz.

Indirect costs arise when electricity producers raise their prices to offset the impact from ETS allowances | Photo credit: Fotolia

By Guy Thiran & Gerd Götz

08 Sep 2016

Following years of political deadlock, a number of MEPs have now proposed bold steps to address how Europe compensates for indirect carbon costs in the emissions trading system (ETS).

This push for a more effective model should be embraced, as the European Parliament works towards a single solution.

A smart, hybrid approach to compensation is the best option for MEPs to keep Europe’s power-intensive industries competing globally and investing in new sustainable innovations.


This hybrid model should provide full compensation for best performers up to 2030 via a central EU fund combined with voluntary member state top-up to benchmark levels.

Indirect costs arise when electricity producers raise their prices to offset the impact from ETS allowances, increasing the electricity bill for power-intensive industries. Overall, Europe’s non-ferrous metals producers will face €4.3bn indirect costs over the Phase III period (2013-2020).

Under current rules, member states can choose whether to partially compensate these costs. Only nine governments have done so to date, compensating between 0.3 per cent and 75 per cent of indirect costs incurred. In contrast, manufacturing plants have complete certainty that they will be fully compensated for their direct carbon costs.

This partial compensation results in 40 per cent of non-ferrous metals production failing to benefit from any support, despite the strategic importance of aluminium, copper, zinc, ferro-alloys and nickel to Europe’s sustainable growth.

Several parliamentary groups now seek a more balanced EU system. They have proposed a level of centralised EU compensation that will establish a baseline across all member states. Some also propose a hybrid approach, allowing national governments to provide additional compensation according to state aid provisions.

This represents a huge improvement over current rules; however, it still only takes us half way to maintaining the international competitiveness of Europe’s top-performing industries.

Our greatest concern is being left with a rigid, centralised, compensation system where everyone loses across member states.

Certain MEP proposals only allow compensation for 15 per cent of costs, without the possibility for national top-ups. Levels this low will mean that no company could receive sufficient support to remain globally competitive, worsening the situation in the countries that already give compensation.

By 2030, indirect carbon costs for European aluminium producers are projected to rise to 25 per cent of their total sales price. Producers of copper, zinc, ferro-alloys and nickel will all face a similar burden.

This needs to be offset through full compensation measures as well as a continued qualitative assessment for Carbon Leakage eligibility (taking into account their inability to pass through extra costs).

A smart hybrid model is the only way for MEPs to achieve their ambition for ETS. They have a one-time opportunity to get this right.

To provide a base level of predictability, we estimate that centralised EU compensation will need to offset at least 50 per cent of total indirect costs. National governments should be allowed to fully supplement this to benchmark levels, ensuring the viability of the most sustainable installations without any future degression.

The benefits of such a model will be threefold. Firstly, stimulating new investments and stopping the risk of carbon leakage will boost the global competitiveness of the best performing installations. Secondly, reducing discrepancies in levels of support between regions will create a level playing field in Europe.

Finally, making the legal framework predictable will open a new era for industrial innovation in line with Europe’s 2050 climate change objectives.

In the coming months, MEPs have an opportunity to make a real difference. A smart hybrid model is much more than a short-term fix for the industry; it can open the door to the next phase of sustainable industrial growth in Europe.