March 19 (Bloomberg) -- The European Union should consider granting more free carbon allowances to most efficient energy-intensive companies and exclude such permits from trading, according to the EU steel industry lobby Eurofer.
The 28-nation bloc must base the allocation of greenhouse-gas quotas to manufacturers on less stringent emissions benchmarks to keep its industry competitive amid widening energy price gaps with the U.S. and Japan, Eurofer Director General Gordon Moffat said. The call from the lobby, whose members include ThyssenKrupp AG and Voestalpine AG, to overhaul Europe’s 53 billion-euro ($74 billion) emissions-trading system comes before EU leaders’ first debate on post-2020 energy and climate policies later this week.
“I’d anticipate a two-tier ETS: one which is tradable and the other composed of energy-intensive industries entitled to free allowances, which would be apart,” Moffat said in an interview in Brussels. “Emission caps have to be based on realistic benchmarks so that the best performers are guaranteed enough to continue operating.”
The ETS, which imposes pollution limits on about 12,000 installations owned by manufacturers and utilities, is the EU’s key tool to reduce greenhouse gases, which scientists blame for global warming. In the current trading phase that started last year, the system is moving toward selling a greater share of emission permits at auctions. Industries such as steel and aluminum, which are deemed prone to relocating production to regions without emission curbs, still receive a bigger share of free allowances than other sectors.
The European Commission, the EU’s regulatory arm, has recognized the need for free allocation beyond 2020, said its climate spokesman Isaac Valero-Ladron.
“In this regard a two-tier ETS with non-tradable allowances for some seems to violate the laws of economic logic,” he said by e-mail today. “Targets are achieved cost-effectively when all ETS participants face the same carbon price signal.”
The future climate and energy policy framework has divided national governments, the industry and non-governmental organizations. The commission proposed in January that the EU should deepen its carbon-cut goal to 40 percent by 2030 from 1990 levels, compared with 20 percent for 2020. EU leaders plan at their March 20-21 meeting to agree on a timeline for a decision on what policies to pursue, eyeing a final verdict in the second half of this year.
The challenge for policy makers will be to reconcile the bloc’s ambition to lead the global fight against climate change with the need to foster economic growth. While green lobbies including Greenpeace call for a more ambitious goal, Eurofer urges a balance between climate, energy and industry policies after the economic crisis cut EU crude steel output by around a fifth and rules on carbon-permit allocation curbed the amount of free allowances from 2013.
“We’re in a situation where our protection is reducing,” Moffat said. “There will be a shortfall of allowances by 2021 and that means that even most efficient steel producers will have to buy up to 75 percent of their permits. That may be bearable with 2 euros per ton but with 30 euros it’s catastrophic.”
EU allowances for December rose 4 percent to 6.06 euros a metric ton on the ICE Futures Europe exchange in London today. They lost about 80 percent over the past six years as industrial production fell, adding to a surplus of permits that reached more than 2 billion tons last year, equalling the EU average annual pollution limits. To help alleviate the glut, the EU started earlier this month temporary curbs on the supply of allowances at government auctions under a measure known as backloading.
To stabilize the market in the long-term, the EU should bar companies from selling surplus allowances received for free unless they can demonstrate that the excess was due to improvements in efficiency, according to Eurofer.
“We’re in a situation where the system is unstable because of free allowances and we can avoid interventions by restructuring the market,” Moffat said. “Free allowances would be provided but you wouldn’t be able to sell them so there’d be no surplus. The tradable part, which is around 70 percent of the market, would continue and would be automatically tightened.”
As a principle, the most carbon-efficient installations must have no costs of carbon directly linked to the ETS or passed through in power prices, according to Moffat. Benchmarks used to decide on allocation of permits must be based on achievable levels and should be reviewed every five years or so, he said.
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