Energy and Climate Change

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energy and climate change
23 May.2016 ,

Strong industry concerns on the ITRE Draft Opinion on the EU-ETS Reform post-2020 and other thought experiments putting industries at risk of carbon leakage

Tiering is not the solution

The undersigned energy-intensive industries express their strong concerns regarding the proposal to introduce “tiered approaches” to carbon leakage protection, as introduced in the ITRE Draft Opinion.

According to all forecasts, “tiering” is not needed.

All forecasts, including the Commission’s Impact Assessment, predict that a shortage of free allowances is highly unlikely during phase IV of the ETS. A shortage can be as good as excluded if the proposed share of allowances to be auctioned were properly calculated. Those 700 million ‘unused’ allowances of phase III (that were earmarked for free allocation but remained unallocated due to business closures or a lack of new entrants) should remain available and within reach if needed for production, recovery and growth during 2021-2030. Thus, the ETS reform can deliver the agreed emission reductions cost-effectively, encourage best performance through safeguarding full and effective carbon leakage protection to the benchmark level. There is no need for exposing parts of EU industry to undue carbon costs.

The ITRE Draft Opinion proposes to expose a lot of industrial sectors to the risk of carbon leakage.

Burdening companies with undue carbon costs by cutting free allocation would divert resources from modernising and upgrading industrial infrastructure, thus exacerbating the risk of investment leakage to countries with less stringent climate policies. This does not send a positive signal to European
industry to accompany its decarbonisation investments and undermines our faith in, and support for, the ETS as a cost-effective means of reducing carbon emissions.

“Tiering” is based on theoretical assumptions and distorts the internal market

The proposed tiering has no environmental or economic justification and is based on flawed assumptions (“cost pass-through”) of unpredictable market dynamics. It reserves free allowances for some sectors at the expense of others. It goes against the principle set in the October European Council Conclusions that best performing companies in ETS carbon leakage sectors should not bear further carbon costs. Indeed, tiering would ensure that even best performers in most sectors would bear significant carbon costs and expose them to carbon and investment leakage.
Statistical indicators vary - sometimes greatly - with time and depend on many factors (market conditions, company structures, exposure to international trade, etc.). Hence, the setting of thresholds would be arbitrary and would risk not reflecting future needs and leakage risks of the sectors.


As a result, we call on the Members of the ITRE Committee to react strongly to the Draft Opinion, so that the ETS reform delivers full and effective carbon leakage protection without the need for arbitrary discrimination. Jobs in one sector are neither more nor less important than those in other sectors.


We call for an approach based on realistic benchmarks, allocation based on more recent production data and an adequate reserve that ensures full allocation to benchmark levels. Fairness and solidity should become key principles of policy making. We ask you to create a framework that gives all sectors an equal opportunity to compete and thrive in Europe, and not to pick certain sectors to stay in Europe.

 

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09 May.2016 ,

ETS Review: Five comments and proposals on the ITRE draft opinion

On 26 April the ITRE rapporteur published the draft opinion on the Commission proposal to review the Emission Trading System. While the report includes some positive proposals, other aspects still need to be improved. In some cases, some proposed solutions would need to be thoroughly thought through, as they would have the unintended consequence of negatively impacting industrial competitiveness and destabilising the regulatory framework.

The following five aspects are of primary importance:


1. Availability of free allowances for industry

On the positive side, the report seeks to increase the availability of free credits for new entrants and production increases. On the other hand, the report does not address the fundamental question of how to ensure enough free credits to meet industry’s needs.

CEPI proposal: as future industry demand for free credits is subject to many uncertainties, any firm decision taken now will likely result in either excess of unused free credits or an excessive shortage of these. We would thus suggest focusing on:

  1. Re-balancing the share free credits/auctioning to 47.5% /52.5%, to take into consideration free credits originally allocated to industry but unused due to the economic crisis.
  2. Stimulating and rewarding investments in low-carbon technologies: this would be the most cost-effective way to meet the free credits cap while improving industry’s competitiveness.
  3. Defining in the legislation a process whereby the availability of free credits is constantly monitored and, in case of upcoming shortage, the legislator is called to take the most informed decision, exploring all available options.


2. Carbon Leakage

The proposal from the rapporteur is simply unacceptable. The motivation that such a “tiered” approach would support the “sectors in greatest need” is arbitrary and lacks any evidence that such a system would target “those sectors genuinely and most exposed to carbon leakage”. Such a discriminatory approach, if approved, would inevitably entail legal challenges in courts, leading to an unstable and unpredictable regulatory framework. Moreover, it would increase the risk of carbon leakage for most sectors in the economy, putting millions of jobs across industries and local communities at risk.

CEPI proposal: keep the Commission proposal.


3. Benchmarks update

The proposal from the rapporteur is heading in the right direction. Building on the Commission proposal, it stresses the need to use real data and tries to accommodate the need of those sectors moving at a slower pace in emission reductions.

On the other hand, the slower reduction pace should be enlarged to any type of emission, not only to “unavoidable process emissions”. Moreover, the proposal does not address the risk for a sector of remaining “trapped” into one reduction pattern, independently of technological progress. The report also does not address rules for assessing progress in installations not covered by product benchmarks (so-called fall-back approaches), which are responsible for one third of industrial emissions.

CEPI proposal:

  1. Build on the rapporteur’s proposed amendments.
  2. Assess progress in comparison to latest benchmark value set in the legislation.
  3. Broaden the 0.3% category to any type of source of emissions.
  4. Specify in the legislation the rules for assessing progress in installations not included in product benchmarks (fall-back), based on energy intensity improvements.


4. Indirect carbon costs passed on in electricity prices

Although we strongly support the need to reduce the impact of carbon costs in electricity prices, the proposals will have little or no impact in this respect. This is because most industrial installations purchase electricity on the wholesale market. Differing levels of compensation will not impact the way the electricity market operates, thus the way carbon costs are passed through in electricity prices. Suggesting that no compensation should be paid if the carbon price is less than 15 euros would expose industrial sectors to real costs in the short to medium term and is based upon the same flawed “tiering” approach proposed in the carbon leakage policy area.

The proposals would therefore increase the carbon cost exposure for industries while not addressing the shortcomings of the current state aid regime, namely the lack of compensation in all Member States and the unpredictability of the rules. It should also be noted that, in some countries, the lack of compensation for indirect costs coupled with no free credits for electricity produced and consumed on-site (as in the case of CHP) is already leading to up to 40% shortage in compensation for on-site emissions.

CEPI proposal: the ETS review needs to ensure 100% compensation for both direct and indirect carbon costs throughout the whole trading period, at benchmark level.


5. Innovation Fund

We welcome the rapporteur’s attempt to increase and facilitate access to the financing of innovative projects in the industry. We also welcome the attempt to clarify the parameters already upfront in the text of the directive; this will accelerate the process by timely releasing the first funding opportunities.

CEPI proposal: build on the rapporteur’s initiative. Strengthen provisions on the share of financing support, ensuring all industrial sectors can really benefit from this opportunity.

 

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19 Apr.2016 ,

Reaction to the tiered approach to carbon leakage protection

The signatories (see below), energy-intensive industries express concerns regarding the so called “tiered approach” to carbon leakage protection under the EU ETS

The tiered approach1 would reserve free allowances for some sectors at the expense of others. It goes against the principle set in the October European Council Conclusions that best performing companies in ETS carbon leakage sectors should not bear further carbon costs. Indeed, it would ensure that even best performers in most sectors would bear significant carbon costs and expose them deliberately to carbon and investment leakage.

The proposed tiering has no environmental or economic justification and is based on flawed assumptions (“cost pass-through”) of in reality unpredictable market dynamics. Depriving sectors of carbon leakage provisions would not deliver decarbonisation through investment and innovation. Moreover, it could well prove to have been entirely unnecessary. All forecasts, including the Commission’s Impact Assessment, predict that there will be sufficient allowances available to ensure full free allocation to benchmark levels at least until 2025: and there are other proposals for ETS reform that would deliver full and effective carbon leakage protection without the need for arbitrary discrimination.

To that end, we continue to support an approach based on realistic benchmarks, allocation based on more recent production data and an adequate reserve that ensures full allocation to benchmark levels. The proposed share of allowances to be auctioned shall also be recalculated downwards, as analysis of the EC proposal shows, it does not properly include the number of allowances which were to be given out for free (i.a. unallocated and left-over NER allowances).

In the circumstances, the “tiered approach” would introduce an unnecessary and unfair discrimination between sectors. Fairness and solidity should become key principles of policy making. Jobs in one sector are neither more nor less important than those in other sectors. The signatories fully share and support the BusinessEurope views on tiered approach as expressed in a statement on April 14th.

We ask you to create a framework that gives all sectors an equal opportunity to compete and thrive in Europe, and not to pick certain sectors to stay in Europe. It would undermine our industry’s faith in, and support for, the ETS as a means of reducing carbon emissions.

For further information please contact Peter Botschek, Cefic Director Energy & HSSE, e-mail pbo@cefic.be

1 i.e. as presented in a Non-paper on a Tiered Carbon Leakage List in Phase IV of EU ETS (authored by France, the United Kingdom)

 

 

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18 Apr.2016

Global Forest Products Industry is Part of the Solution to Climate Change

São Paulo – The International Council of Forest and Paper Associations (ICFPA) and its members welcome the signing of the landmark United Nations agreement to tackle climate change, set to take place on April 22. The agreement urges countries to implement policies that would allow them to keep a global temperature rise below 2 degrees Celsius. The global forest products industry has a highly significant role to play in the implementation of these targets.

“The global forest products industry has made significant strides in reducing its carbon footprint, stocking carbon, and generating greenhouse gas removals – all helping to mitigate climate change”, said ICFPA President and Brazilian Tree Industry (Ibà) President Elizabeth de Carvalhaes. “This agreement is crucial to implementing some of the policies that consider biomass as carbon neutral when harvested from sustainably managed forests and to further recognize all positive contributions that forests and forest products provide in combating climate change.”

The inherently-renewable global forest products industry remains committed to mitigating climate change for the benefit of the green economy and society at large. ICFPA members have achieved an impressive 5% reduction in their greenhouse gas emissions intensity since 2010/2011 and 17% since the 2004-2005 baseline year (2015 ICFPA Sustainability Progress Report).

The European pulp and paper industry has been a global champion in mitigating greenhouse gas emissions. It has set itself in 2011 a clear vision of becoming carbon neutral by 2050 and since then, taken concrete steps to reach that goal,” said Jori Ringman, Acting Director General of Confederation of European Paper Industries (CEPI). “Thanks to responsible sourcing practices and sustainable forest management, the forest area is growing in Europe by an area of over 1,500 football pitches per day. CEPI is pleased to see development in the same direction globally”, he added.

The forest industry’s significant role in mitigating climate change was highlighted in the ICFPA-commissioned report Analysis of Forest Contributions to the INDCs by acclaimed researcher Paulo Canaveira. Having looked at the contributions of forests in the national targets of ICFPA member countries (INDCs) and global mitigation effort from 2020 onwards, the report concludes that many countries identify forests and the land-use sector as relevant to policies and measures implemented to meet their targets. Reducing emissions from deforestation, but also sustainable forest management, afforestation and reforestation are commonly mentioned as key mitigation practices. In some developing countries, they even constitute the country’s main contributions.

Other climate change mitigation efforts of the global forest products industry include supporting national and regional climate policies and programs; investing in technologies with low carbon footprints and ones that improve carbon sequestration; and developing bio-based technologies to find innovative ways to use wood fiber and substitutes for goods traditionally made from fossil fuels.
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Note to the editor:

The ICFPA represents more than 30 national and regional forest and paper associations around the world. Together, ICFPA members represent over 90 percent of global paper production and more than half of global wood production.

For more information about the global forest and paper industry, visit icfpa.org.
 

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04 Apr.2016

Joint declaration by a group of industry associations “2016, time to deliver… an ambitious power market reform”

The signatories of this declaration gather leading associations and industry groups with a clear stake in Europe’s energy policy. We share the conviction that only a flexible and dynamic energy system, making the best use of innovative and distributed supply and demand options, can ensure a cost-efficient and sustainable transition towards a decarbonised energy system.


We strongly believe that a market-driven environment is the best means to provide long-term investment signals while meeting all system needs and accommodating the growing share of renewable energy in the energy mix. The completion of the Internal Energy Market will improve system adequacy and efficiency, increase security of supply, support the competitiveness of European industry, and help deliver the energy and climate goals stemming from the COP 21 agreement and EU’s post 2020 objectives on emissions reductions, energy efficiency and renewables.


However, we see many constraints persisting in the energy sector that affect investment decisions, in particular: 1) depressed wholesale market prices due to overcapacity; 2) fading EU-coordination of energy policies with a tendency towards renationalisation; and 3) an antiquated set of market rules.


Market rules have been tailored to centralised production within national boundaries for too long. Not only have they failed to adapt to developments in energy technologies and evolution of demand patterns both at industry and end-consumer level, but some of them hamper the deployment of renewables, storage and demand-side flexibility. These new technologies can today provide valuable services including balancing energy offering significant flexibility to the system.


The energy system is now more complex to plan, control and balance. It needs enhanced flexibility that could be provided by a mix of options, but this would require significant changes in the relevant legislation. In this respect, we consider the upcoming legislative package on market design as a unique chance to provide the energy sector with a predictable investment framework, fairer market conditions, and ultimately seize new opportunities arising from decentralised energy production and demand side participation.


In particular, we deem essential that any ambitious reform of the energy market addresses the following issues:


1. Providing adequate price signals and further integration of short-term markets across borders
2. Ensuring a balanced approach to system adequacy that fully takes into account the contribution from renewable energy supply and demand sources
3. Implementing a level playing field for all flexibility providers to foster the pan-European trading ofelectricity and grid support services.


1. Providing adequate price signals and further integration of short-markets across borders
In a well-functioning electricity market, unhindered price-formation drives operational choices and investment decisions. Transparent and undistorted market prices must be in place in all time horizons, and allowed to move freely without caps. Wholesale electricity prices reflecting scarcity would signal the need for investments in new capacity. Therefore, price spikes should be treated as a positive sign of an efficient and cost-effective energy system where market participants are free to choose the level of hedging they prefer to contract, revealing the true value of flexibility and energy at all times.
Market rules also need to be adapted so as to enhance clean and flexible energy providers to trade power over broader geographical areas and as close as possible to the time of delivery. In this context, the opening and cross-border integration of intraday market is essential, especially for energy producers whose output is variable. A as long as separate procurement of balancing capacity and energy is guaranteed, another important aspect is the possibility to negotiate the duration of contracts, e.g. for balancing contracts. This is crucial, as certain flexibility technologies may require considerable capital investment and, therefore, contracts with a longer duration.


2. Ensuring a balanced approach to system adequacy that fully takes into account the contribution from different energy sources


The main challenge for security of electricity supply is not the availability of capacity as such, but the availability of flexibility that is needed to support the system and provide for a constant balance between supply and demand.
In order to identify potential, locally constrained adequacy issues, system adequacy assessments should be carried out according to a common methodology and metrics transparently defined in EU legislation1. Such analysis should be performed at regional level and consider the potential of all flexibility options, from the various energy supply and demand sources. This would ensure a rigorously needs-based approach to the introduction of Capacity Remuneration Mechanisms (CRMs) when the market cannot not deliver the adequate flexibility.
If CRMs are deemed necessary, they should be designed in a way that minimises any negative impacts on price formation on energy markets. They should avoid contributing to continued overcapacity situation by keeping redundant and polluting power plants online, and prioritise clean flexibility options as foreseen in the energy state aid guidelines.


3. Implementing a level playing field for all flexibility providers2 to foster the pan-European trading of electricity and grid support services

In addition to the modernisation and further opening of the balancing market, a proper market for ancillary or grid support services needs to be fostered to provide additional non-discriminatory revenue streams to flexibility providers, as well as overall operating cost savings for the energy system. As of today, a number of services and solutions from decentralised generation and demand-side response are technically feasible, but current market conditions do not properly value their commercial provision.
The continued adaptation of balancing and ancillary services markets should foster liquidity and incorporate innovative and decentralised solutions. Prohibitive pre-qualification requirements and access conditions for independent aggregators, extended product-durations or minimum thresholds and symmetric bids are some of the aspects currently hampering an effective market. Moreover, contradictory regulatory signals, e.g. regarding network tariffs, the operation of industrial loads or co-generation should be addressed to ensure demand side flexibility further develops without impeding the achievement of robust energy efficiency targets.

1 Incl. a clear system adequacy target level for all control areas in the EU as many countries are lacking one
2 “A service provided by a network user to the energy system by changing its generation and/or consumption patterns in response to an external signal” (Task Force Smart Grids report, 2015)in

 

 

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