Europe to Propose Carbon-Linked State-Aid Rules Early Next Year

European Union regulators want to propose early next year rules on financial aid after 2012 for companies that would be inclined to relocate manufacturing to regions that aren’t subject to emission restrictions.

The measure is needed to “strike a reasonable balance” on support for electricity-intensive companies when the bloc’s carbon cap-and-trade program moves to the next phase as of 2013, Joaquin Almunia, the EU’s competition commissioner, said today at a conference in Berlin. The EU emissions-trading system, also known as the ETS, imposes carbon-dioxide limits on more than 11,000 utilities and manufacturers, including Royal Dutch Shell, the continent’s largest oil company and ArcelorMittal (MT), the world’s largest steelmaker.

“The best way to tackle this risk of carbon leakage would be a global agreement through the United Nations that engaged all major economies to sharply reduce their emissions,” Almunia said, according to an e-mailed speech. “Until this happens and to seal the borders of the EU against carbon leakages, Europe’s governments will be under pressure to help companies shoulder the higher CO2 cost.”

The 27-nation EU, which has given away the majority of emission permits since it started its carbon-trading system in 2005, will sell majority of allowances in the next phase of the program beginning through 2020. EU emissions law also allows member states to adopt measures to compensate the companies for the costs relating to greenhouse-gas discharges passed on in electricity prices, or so-called indirect emission costs.

Extra Costs

“Although we will alleviate the burden, I believe that the extra costs should remain in part with the firms, which would give them an incentive to innovate, save energy, and demand green electricity,” he said. “This is why the list of sectors eligible for state aid to compensate them for the ETS extra costs should be well targeted and the public support should be used with parsimony.”

At a carbon price of 15 euros per metric ton, it costs an aluminum smelter on average an additional 30 million euros per year to cover the indirect emissions costs passed on in power prices, according to the European Aluminium Association. The group represents producers in 18 European countries and includes Alcoa Inc (AA), the biggest U.S. aluminum producer, and Rio Tinto Alcan, a unit of the world’s second-largest mining company Rio Tinto Group.

“As we have had to pay these huge costs since 2005 and cannot cope with such a burden for long there has been virtually no new investment, some smelters have closed and the remaining smelters keep going in the expectation of financial compensation,” the association said in a submission for public consultations on the state aid rules launched by the EU earlier this year. “If this is not provided in a timely manner, most will have no choice but to close.”

Shifting Production

To prevent businesses from shifting production elsewhere to avoid pollution restrictions, the EU agreed in 2009 to grant 164 manufacturing industries a greater share than other companies of free carbon allowances after 2012.

Permits still allocated for free in the third phase of the ETS will be handed out to companies based on a benchmarking method that promotes the most-efficient installations in a given industry. Industries on the carbon leakage list will receive 100 percent of benchmarked allowances for free, according to the EU law. The list, which includes aluminum production, manufacture of refined petroleum products and mining of chemical and fertilizer minerals, will be valid through 2014 and then revised based on unchanged criteria.

Manufacturers that aren’t on the list will receive 80 percent of benchmarked allowances for free in 2013 and face an annual decline in that share to 30 percent in 2020, while most utilities will face 100 percent auctioning as of 2013.

Financial Compensation

The list of sectors eligible for financial compensation for indirect emission costs should in principle be identical to the carbon leakage list, the Netherlands Chemical Industry Association said in a public consultations paper.

“The need for financial compensation, just like free allowances, remains as long as costs from the unilateral EU ETS are not matched with equal climate policy related constraints and costs in both developed and developing regions,” it said.

The possibility of financial support under the EU law is based on the premise that aid for indirect emissions may be highly distortive if it is not properly targeted to sectors that are at significant risk of carbon leakage due to indirect emissions and limited to the additional cost stemming from the ETS, the commission said in March.

“A poorly targeted support to the biggest users of CO2- intensive electricity would relieve them of the costs of the new ETS system at the expense of other sectors and would undermine the overall aim of the scheme introduced to cut emissions in cost-effective ways,” Almunia said today.

To contact the reporter on this story: Ewa Krukowska in Brussels at ekrukowska@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net

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