“What’s the one thing you need to make low-carbon investments here in Europe?” That was the question posed to our industry by the European Commission at a workshop on low-carbon innovation this month. The answer was unanimous: a secure and stable framework to compensate for our indirect costs from the EU Emissions Trading System (ETS).
Member States have yesterday agreed on their General Approach for trilogue negotiations with the European Parliament and Council. Let me explain why our industry’s innovation potential is so dependent on EU policy makers finding an effective solution for indirects compensation.
Why are indirect costs an issue?
In principle, an Emissions Trading System has incredible potential to move Europe towards a low-carbon economy. The non-ferrous metals industry wants to be part of this transition and has long been in favour of a strong, secure ETS framework.
But, the current ETS does not meet this standard. The indirect costs it forces on our industry undermine our ability to compete in a global marketplace, just at the time when we need to invest into low-carbon technology breakthroughs.
The problem starts with electricity producers. They raise their prices to offset the costs of ETS. And for power-intensive industries like ours, this translates to higher electricity bills that damage global competitiveness.
For an aluminium smelter connected to the western electricity market, a carbon price of €5 already translates to additional power costs of 4% of today’s aluminium price. If this carbon cost increases to €25, the CO2 cost would be equivalent to 25% of today’s aluminium price.
There is one global price for aluminium. Our international competitors in China and other emerging economies do not have these indirect carbon costs. Yet, we all compete in the same marketplace under the same globally-set prices.
So, what should European policymakers do? Get smart, and make sure indirect costs are treated equally to direct costs under the reformed ETS.
Smart Hybrid Model
A “smart hybrid model” would empower Member States to compensate businesses for the indirect costs that threaten our industry.
While support for this model is strong in the European Parliament, MEPs have introduced a crucial flaw in their final proposal: degressive aid. This approach sets a maximum level for national compensation that must decline over time. Degressive aid will not solve Europe’s competiveness problem. In fact, it makes it worse, counter to the objective of addressing carbon leakage.
With trilogue negotiations now set to begin, EU policymakers need to find a way to encourage all Member States to provide indirect compensation. We don’t want to be left with legislation that artificially limits those countries with a strong policy for keeping their industries competitive.
Combined with increased carbon prices, degressive aid actually penalises businesses. It limits the available compensation even if companies invest in the best low-carbon technology. Without energy efficient technology, however, Europe cannot meet its climate goals and global temperatures will continue to rise.
Even more, the calls for degressive aid in the Parliament clearly contradict the European Council’s conclusions in 2014 that “the most efficient installations…should not face undue carbon costs” for both the direct and indirect costs. Free allocation for direct CO2 costs is allowed up to 100% based on benchmarks, and similar conditions should apply to compensation of indirect costs.
Innovating to the future
European metals producers are clear global leaders in energy efficiency and nowhere was this more obvious than the workshop at the Commission.
From a German copper manufacturer capturing energy from waste heat, to a Norwegian aluminium producer’s plant that consumes 12% less energy than the world average, Europe metals producers are at the forefront of the sector’s innovation.
Ensuring more big breakthroughs – made here in Europe – requires financial security and stability. Without predictable compensation for indirect carbon costs, these investments will be redirected away from Europe - the cleanest area for metals production in the world - to heavy polluter countries like China. It’s in all our interests not to let that happen.
Learn more on the smart hybrid model in the Parliament Magazine.