Trading of emission rights – impact on European industrial production
The two speakers Dr. Engelhard (RWE Rheinbraun) and Mr Moritz (BASF) explained the problems, that accompany the planned directive for emissions trading (ET) as proposed by the European Commission, for companies such as energy-intensive or electricity producing companies.
Dr. Engelhard criticised that the caps are only given and only introduced for energy intensive installations, this means that only 1/3 of Greenhousegases (GHG) of the EU are covered and that the cap in trade is introduced for CO2 not for all six Kyoto gases.
As representative of RWE Rheinbraun Dr. Engelhard mentioned the very hard impact on the European indigenous and world-wide competitive energy source “lignite” by ET and that there is no use made of international project based instruments like Joint Implementation (JI) and Clean Development Mechanisms (CDM). He explained, on background of using the flexible instruments, it would be more efficient to build a new power station with the best available technologies in China than to raise energy efficiency in Europe by 2% to reduce GHG world-wide.
Dr. Engelhard reckons with unavoidable distortions in competition and disadvantages for the European industries. Furthermore he mentioned that an absolute emission cap would hinder a growth of energy intensive companies and that CO2 pricing puts high burdens on European coal and lignite producers comparing to additional natural gas imports and nuclear. A switch to gas would have negative impacts on security of supply.
Dr. Engelhard expects a transfer of energy intensive production to countries without regulations, this means to Eastern Europe, developing countries or to the United States. He criticised that the European Commission’s ET proposal neither takes into account the methane and CO2 emissions caused by the production and transport of fossil fuels nor the different national boundary conditions like different taxes, different regulations and negotiated agreements. He expressed also that the negotiated agreement in Germany would be disturbed by the ET-system, would raise the costs and would not be compatible with this existing agreement.
Finally he mentioned that an ET-system installed at the same time with a negotiated agreement would not benefit the climate, but would lead to the ousting of lignite from the power market.
Dr. Engelhard’s main arguments:
• Windfall profits for natural gas, nuclear and renewables
• Increase in power prices
• Negative impact on security of supply
• Job losses in the lignite and hard coal industries
• Transfer of jobs in energy intensive export industries in third countries
• And all this in our case in our industry without any reduction of GHG.
• The conditions and the status of GHG mitigation differ greatly in the EU member States.
• This means that the measures taken to fulfil the Kyoto commitment must differ as well.
• All EU member States should be free to use the instruments which they consider adaquate.
• A European ET proposal should be an offer for member States, which can be used or not; the member States must be able to decide whether their industry should participate or not.
• A cap and trade system can have very severe economic consequences which are not yet fully understood. Thereforee, it is necessary to have a pilot phase before definite decisions are taken.
• A European directive must respect existing national policies and measures, e.g. negotiated agreements in Germany. Double regulations for the same political goal are economically disadvantageous and legally challengeable.
The second speaker Mr Moritz criticised the ET proposal from the view of the chemical industry. His first opening comment was that the chemical industry is a very energy intensive sector and that the ET proposal has therefore high impacts on the company he is representing “BASF”. The second point he mentioned was that the CO2 problem is not an European but a world-wide problem. A management on European level is therefore inefficient.
Then he started to explain which measures were taken by BASF to reduce CO2 emissions by using best technologies. Nevertheless the result was a raise of CO2 emissions based on growth. What means, that there is now opportunity for BASF to reduce emissions. If this company would like to expand it has to purchase allowances. He criticised the grandfathering and the hence resulting advantages for companies in other member States, which invested nothing in the last decade to reduce their emissions.
Mr Moritz reckons with the decision of the BASF board not to invest anymore in Europe, because of paying allowances, but to invest in Non-EU-Countries and to change the location. He calculates with an additional investment of 2-3,5%, if the next plant would be build in Europe. An investment outside the EU would allow BASF to shut down the plants in Europe and at the same time BASF would gain money, in fact 13-22% credit for investment, what is accompanied by job losses and by no global CO2 reduction.
The only solution seen by Mr Moritz for a company like BASF is banking of allowances to use them some years later. Mr Moritz sees clearly advantages of a trade on country level instead of the company level. The reason therefore is the large market and the better value, that would be reached by investments in developing or Eastern European Countries and not in the energy intensive industries in Europe. As Dr. Engelhard, he expects also a large increase of the gas price and windfall profit for the gas industry.
Representatives from the European Commission – Mr Vis (DG ENVI) and Mrs Koskimaki (DG TREN) – defended the instruments and rules given by the proposal, but were also very thankful for the comments of the representatives of the effected industries.
Mr Vis expressed clearly that ET would indeed limit the CO2 emissions of the sectors covered by the ET scheme. But he raised the question how Europe could meet the objectives, which are already given by Kyoto, in the least cost way.
He disagreed with the two speakers in the point that there is a cap foreseen for individual companies. In his view the member States would give an additional allowance to every single company or installation, so that they will allocate initially a certain quantity of allowances, but they would not have a certain emissions cap. Anyhow the installation is always able to emit as much as it likes on the condition that it has in its possession allowances to cover those emissions.
Of course, if their emissions allocation is not sufficient, they have to go somewhere on the market and to buy the necessary allowances. What they must insure is that at the end of each year they possess enough allowances to cover their actual emissions during that year.
Concerning the compatibility of ET and voluntary agreement he maintained that ET is compatible with voluntary agreements. Because the ET proposal has explicitly allowed any natural or legal person to hold allowances and this provision enables flexibility, whereby sectors can pull their allowances allocated to individual installations into the registry account of the sectoral association. He believes that the real problem with assuming the ET proposal is the assumption of individual targets and from that it would become clear to everyone, which individual companies doing better and carrying those who doing worse.
Finally the EC proposal would not require additional effort over and above voluntary agreements that exist in certain member States, if that member State agrees that the degree of effort in-bodied in that voluntary agreement is efficient to meet the commitments of the burden sharing agreement.
Mrs Koskimaki pointed out that an appropriate instrument to gain CO2 reductions in a most cost effective way in a single European market would be an ET- system, how proposed by the Commission. Other less appropriate solutions would be energy taxes or other fiscal incentives. Secondly Mr Koskimaki explained that it is a very important that by this proposal the Commission is assuring that there will be a playing field situation for all companies who are working in energy sector and that it is quiet important, that there couldn’t be any special interventions by member States.
The debate continued by pro and contra arguments of representatives of the European Parliament and of other companies and organisations. Particularly they argued by means of different studies (such as simulation exercises like GETS I+II+III), which underlined the feasibility and efficiency of an ET-system. On the other hand the representatives of companies who fear the negative economic effect on their business criticised the proposal.
In his conclusion, Dr Linkohr who chaired the meeting mentioned amongst other points existing contradictions. One between a proposed national system for CO2 ET and a trading between the member States, what conflicts with the idea of an open market for electricity and gas. The member States are forced to harmonise their energy policy, on the other hand the member States insist that they have their national energy policy.
Dr. Linkohr expects a new discussion on the role of nuclear energy. A facing-out of nuclear and a replacement by gas or coal would penalise the industry, because they would have to buy more allowances to emit CO2. He mentioned also the difficult situation of the chemical sector, which has a world-market in contrary to the electricity sector. On one hand the EU imposes European restrictions and on the other hand the European industry has to compete with non-EU-companies.
Therefore Dr. Linkohr mentioned that a new negotiation with the Americans on CO2 must be done on the highest political level, because having solidarity with the US in every field but competition on unequal terms in the chemical or other industries is impossible. Dr. Linkohr argued also from the scientific view, when he raised the question how to measure CO2 emission. As long as it is a calculation dealing with lignite or coal a chemical formula gives the possibility to calculate by rule of thump, but how to measure exactly and in other cases. It would be a difference of having 1000 t/CO2 more or less by a given price of 20, 30 or 50€/t of CO2.
Further more he raised the problem of controlling and responsibility of fixing the exact amount. Concerning the discussion of the best available technology, he argued that could be always better, it is just a question of financing and economic efficiency.
Dr. Linkohr explained the case of Germany, whose government is fighting for getting the allowance from the EC to subsidise coal and at the same time the industry would be penalised by them with the CO2 ET. At the end Dr. Linkohr pointed out that Kyoto has for the public opinion in Europe an importance, like a question of identity. For most Europeans it is a test case whether Europe is willing to do something for the environment or not. With these words he ended the discussion and mentioned the date for the next discussion on CO2 ET.