EU ETS: why "price-taker" industries need recognition

The reformed Emissions Trading System must acknowledge the inability of non-ferrous metals, ferro alloys and silicon producers to pass-on regionally imposed carbon costs
Originally published in Parliament Magazine

Getting the ETS right

MEPs in the European Parliament are preparing to vote on post-2020 reform of the Emissions Trading System. In particular, we’re pleased with proposals to recognise the specific carbon leakage risk for globally-priced sectors unable to pass-on their carbon costs.

We’re now calling on MEPs in the Parliament's environment Committee to build these proposals into their final report. It’s crucial that, as advised by European Council in October 2014, the most efficient installations in all sectors at real risk of carbon leakage are able to make their case to receive the highest level of EU protection.

Cillian O'Donoghue

Energy and Climate Change Director

+322 775 63 12

One-size does not fit all

The European Commission currently takes a quantitative approach when defining their “Carbon Leakage list”, by evaluating each sector’s trade and emission intensity. Those sectors with lower scores are deemed a lower priority for carbon leakage protection. This approach, however, ignores the potential strategic importance of these sectors in providing solutions towards the EU objectives on energy efficiency, renewable energy and the circular economy.

Furthermore, one-size definitely does not fit all. Several industries are too complex to capture in a purely mathematical, quantitative formula. Those sectors can instead request a qualitative assessment, allowing them to provide other convincing evidence demonstrating their eligibility for carbon leakage protection.

Integrating cost pass-through

Our most important risk factor is a sector’s ability or inability to pass-through carbon costs. Non-ferrous metals, ferro alloys and silicon sectors are unusual because their product prices are set globally, according to commodity exchanges like the London Metals Exchange or other similar pricing mechanisms. Because metals producers have no control over their product’s sale price, they are “price takers” and they are unable to pass-on additional local costs to their customers.

At present, non-ferrous, ferro alloys and silicon producers outside of Europe are not subject to regional pricing schemes like the EU ETS. Our top-performing EU installations therefore face unilateral carbon costs which cannot be escaped, disadvantaging them against competitors in other areas of the world.

MEPs can help to mitigate those impacts by recognising the specific carbon leakage risk for sectors una-ble to pass-on their carbon costs. This only requires a minor modification to the Commission’s existing system, but has major benefits.

Recognising price-taker characteristics will help to boost the global competitiveness of the strategic non-ferrous industries in Europe. This will facilitate new investments into energy efficiency improvements, building on our strong track record for innovation. European copper producers have already reduced their unit energy consumption by 60 per cent since 1990, while aluminium producers have reduced greenhouse gas emissions by 53 per cent over the same period.

Looking ahead

We’re pleased to see that several MEPs are already proposing a similar modification to the reformed EU ETS. A number of positive amendments have been submitted, which define that a qualitative “price taker” criteria needs to be added for sectors producing commodities that are traded on worldwide markets for a unique reference price.

Looking ahead, we call on the parliament's environment committee to support this approach and integrate the price-taker formula into its final report. Doing so will support EU competitiveness, encourage innovation, and ensure a fair assessment of our sectors’ carbon leakage risk.