Emissions scheme

Setback for E.U. Carbon Trading Reform

  • Why it matters

    Why it matters

    New European parliament proposals on E.U. emissions trading have drawn heavy criticism from German industry, which says they will impose unreasonable costs and will not help the climate.

  • Facts

    Facts

    • The E.U.’s emissions trading scheme forces heavily polluting companies to buy permits for each ton of CO2 emitted.
    • A compromise reform of the system, which was established in 2005, seemed to have been agreed late last year.
    • New more stringent proposals from an E.U. parliamentary committee has now reopened the debate.
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    Audio

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Sonnenaufgang im Morgennebel
The E.U.'s carbon-trading scheme has long been a source of debate. Source: DPA

Last fall, for a few short weeks, it looked like plans for a reform of the European carbon emissions trading system had succeeded. A compromise deal had been struck that all stakeholders could live with.

But shortly before Christmas, the environment committee of the European Parliament threw a cat among the pigeons, re-opening basic questions and demanding key changes. All bets were off, as squabbling recommenced.

The environmental committee decided that annual deflation of the number of available carbon emissions permits would increase from 2.2 to 2.4 percent. The committee also wants to scrap no less than 800 million currently circulating permits and cut back on the free allocation of permits to industry. In future, industrial companies would also receive lower compensation for increased electricity costs caused by carbon emissions trading.

“Energy-intensive companies in Germany and Europe have things hard enough in the global economy: The E.U. environment committee proposals add to their problems,” said Michael Fuchs, the parliamentary vice-chairman of the center-right Christian Democratic Union, the party of Chancellor Angela Merkel.

“This is in effect a punishment of the most efficient and climate-friendly companies. It will mean industry increasingly shifts production to other areas of the world. The Chinese, Americans and Indians will be delighted. And the climate will not benefit in any way,” Mr. Fuchs warned.

“The Chinese, Americans, and Indians will be delighted. And the climate will not benefit in any way.”

Michael Fuchs, Parliamentary Party Vice-Chairman, Christian Democratic Union

Emissions trading is the central plank of E.U. policy in reducing CO2 emissions in the industrial and energy sectors. Every company with a plant included in the E.U. regulatory scheme has to prove certification for each tonne of CO2 emitted. The number of permits issued is reduced year by year, with the intention of incentivizing a more efficient use of energy.

More than 11,000 energy-intensive industrial plants are legally obliged to participate in emissions trading. These are mainly power plants and factories, located in all 28 E.U. states, as well as Iceland, Norway and Liechtenstein. They account for 45 percent of all CO2 emissions in Europe.

Environment ministers from the E.U. states have not yet taken a position on the committee’s proposals. A meeting shortly before Christmas failed to come to an agreed position. Their next meeting will not take place until February. Also in February, the European parliament is expected to vote on the committee’s proposals.

“The decisions made by the environmental committee are a step backwards. We will have to reopen discussions which we regarded as closed,” said one industry representative.

“Even our most efficient industrial plant will have cost increases imposed. And that only helps non-European manufacturers with substantially inferior carbon-emissions performance,” Hans Jürgen Kerkhoff, president of the German Steel Federation, told Handelsblatt. The plenary session of the European Parliament and the council of ministers should act responsibility to prevent the endangerment of the E.U.’s industrial base, he added.

The reform of the system now under discussion affects the period between 2021 and 2030. One aim of the reform is to lend the emissions-trading system greater traction in achieving environmental goals. For years, permit prices have been so low that the system has done little to incentivize energy efficiency.

There are a number of reasons underlying the fall in permit prices. On the one hand, many companies hoarded permits in poor economic times, and now only need to buy a small number of extra permits to cover requirements. That has a downward impact on prices. In addition, the rapid expansion of renewable energies has taken fossil-fuel plants off the market. That in turn reduced demand for permits and drove prices down further.

On emissions, four decisive questions face industry: How many free permits will companies facing international competition receive? By how much will distributed permits be reduced each year, in order to achieve environmental goals? What benchmarks are used to determine the distribution of permits? And is there adequate compensation for indirect costs of emissions trading?

Indirect costs are reflected in higher electricity prices: unlike industrial firms, the energy sector has to buy all of its permits, which drives up electricity prices. Large industrial consumers of electricity in Europe have costs which their competitors outside Europe simply do not face. They receive compensation for this.

“We must create regulations allowing companies to remain competitive. Otherwise we will be using emissions trading to drive production out of Europe.”

Utz Tillmann, Managing Director, German Chemical Industry Association

In the wake of the committee’s new proposals, industry now feels threatened on all of these points. The chemical industry will “receive fewer free permits, and the costs for individual companies could increase substantially,” Utz Tillmann, managing director of the German Chemical Industry Association, or VCI, told Handelsblatt.

“I can only hope the main body of the parliament and the council of ministers manage to create regulations allowing European companies to remain competitive. Otherwise we will be using emissions trading to drive production out of Europe,” he warned.

In other industrial sectors, worries are focused on threatened cuts to electricity price compensation. A reduction in compensation only makes sense if there is an international price for CO2, the Federation of the Metal Industry, or WVM, said in a statement.

But this is not currently the case. “Only with appropriate compensation for electricity costs can we succeed in maintaining the global competitiveness of the European metal industry,” said Martin Iffert, president of WVM. Aluminum mills, among Germany’s largest electricity consumers, are among the facilities the WVM represents.

The steel industry organization warned that benchmarks — values used to calculate the distribution of free permits — are in need of urgent revision. It said they were in part “technically impossible.” Benchmark values are made tougher every year. In addition, the pace of permit reduction mandated by the European parliament’s environment committee would lead to additional costs, said representatives of the steel industry.

The federal government appears relaxed on the question. The decision-making process was not yet complete, said a source close to government.

 

Klaus Stratmann is the deputy bureau chief of Handelsblatt in Berlin and covers the energy market. To contact the author: stratmann@handelsblatt.com

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