On January 23rd 2008, the European Commission made public a proposal for reviewing the current Emissions Trading Scheme (ETS), the EU’s flagship instrument to combat climate change and meet the EU’s Kyoto targets. Cefic sees emissions trading as a potentially cost-effective means for companies to reduce their greenhouse gas emissions: The ETS could pave the way to more innovative solutions if designed to preserve the necessary competitiveness for developing such products. Cefic has however expressed concerns over the design of the system as it could punish technology leaders by establishing unfair competition with countries not bound by similar CO2 constraints and costs.

High exposure to international competition

Since its implementation in 2005, the system has shown significant weaknesses. It obviously encouraged power producers to introduce a large proportion of the market price of CO2 allowances, even though they received these largely free of charge, into the power price – thereby realising significant windfall profits without environmental benefits. This situation defeats “the polluter pays” basic principle of the ETS. Due to the high degree of global competition in the chemicals sector, the viability of electro-intensive chemical operations in the EU is directly affected by this power price increase. These extra costs do not occur outside of the EU and disadvantage domestic manufacturing.

Huge auctioning costs

Auctioning is proposed by the Commission to become the major method for allocation of CO2 emissions. However, auctioning would represent huge, upfront costs to manufacturing industries. These costs would disadvantage industries in global competition, such as the EU chemical industry that cannot pass on these costs to their customers.

Furthermore, the scope of the ETS would be enlarged, including new products and even small emitters, whereas that would not be very cost efficient due to high administrative costs.

What international agreement?

One good element could be that free allowances will be granted to ‘exposed sectors’ in the case of energy intensive industries. But international competition, market developments and price formation are complex and cannot be fully planned or completely regulated in a legislative text. Moreover it is not sure how the conclusion of international agreements and their implementation in all parts of the world should be taken into consideration for implementing this climate change package. In short, there is a risk for EU industries of being disadvantaged and suffering from their domestic legislation.

To achieve the envisaged emission reductions cost-efficiently, the EU ETS must be workable and sustainable. This implies a more pragmatic, flexible approach that encourages manufacturing performance, paving the way for an effective international agreement while preserving and enhancing the EU's capacity to provide technology solutions for the world.

The European Union representing less than 15% of global carbon emissions cannot solve such a worldwide challenge as climate change on its own. Only a global approach can achieve the environmental objectives set at the United Nations Framework Convention on Climate Change(UNFCCC) and by the European Council and governments to jointly address the issue and to safeguard their implementation.

Cefic understands the wish of the Commission to tackle climate change. But it has to include all aspects. Establishing an absolute link between the reduction of greenhouse gases and the use of renewables is for example far from being always obvious. The use of renewables must be evaluated in a comprehensive scheme, involving all side effects, paying attention to all sources of CO2 emissions, even to the ones that may still be neglected. An intensified agriculture is for example not CO2 neutral. The use of renewable raw materials for the chemical industry has also to be evaluated according to the need for competitiveness and to the kind of competition we are ready to face on this specific market.

Chemical industries have to be acknowledged and promoted. They have used renewables for many years with bio products accounting for about 7% of chemical sales today. Some of these products are well known such as sweeteners, enzymes, vitamines, bioethanol… Having a competitive and sustainable low carbon energy economy is essential to all of us.

This competitive and sustainable approach has to be found with caution: developing a competition between food and industrial users on the renewable raw material market would not look to be a viable option. Recent figures have indeed shown dramatic increases in the corn prices for producing e.g. Polylactic Acid. Consumers are indeed experiencing heavy price increases in food areas. Under current constraints, increasing the use of renewable raw materials is likely to lead to an undesirable competition.

The current ETS has already contributed to increased energy prices. The next ETS should address climate change issues in a more constructive and sustainable way.



Related documents:

• Building blocks for climate change solutions (July 2008)
• Why the European Union needs to invest in the chemical industries’ competitiveness (March 2008)
• Cefic position on ETS (June 2008)
• Performance based benchmarks: achieving EU’s climate goal cost-efficiently (June 2008)
• The Alliance on the Emissions Trading scheme review (May 2008)
• European chemical industry supports more coherent EU energy policy but calls for more effective global approach to climate change (January 2007)
• The chemical industry helps to protect the climate (November 2006)

Cefic contact: Peter Botschek