Central Europe Energy Partners – position paper on ETS reform

Central Europe Energy Partners – position paper on ETS reform

Central Europe Energy Partners, as a regional organisation representing companies from the energy and energy-intensive sectors in Central Europe, advocates for a fair energy transition and adoption of legislation which would help to achieve EU climate policy goals by allowing the Central European industry and power generation sector to adjust to the environmental requirements without harming the economic growth. We share and support one of the EU main goals – reduction of CO2 emissions by 2050, this target, however, should reflect the different levels of economic development of the Member States, their international competitiveness and varying approach to energy security. Moreover, we want to underline that reaching EU’s goals require tremendous investments, which for lower income Member States are and will be a significant challenge to cope with.

ETS influence on CO2 emissions reduction

When ETS was launched back in 2005, it was foreseen that it would lead to 20% decrease of emissions by 2020. This goal was already reached in 2013 (even without using mechanisms such as backloading or Market Stability Reserve and with the low prices of allowances). The EU has further strengthened its position as a world leader, both in decrease of total CO2 emissions (11% of total world emissions) and per capita.

It is expected that by 2020, the decrease will reach approximately 26% in the EU. This is due to the functioning of the second and third phase of the ETS which sped up the introduction of applied innovations. Instead of buying additional allowances, small and medium companies should invest in technologies and innovations.

CO2 emissions reduction in the perspective 2020-2030

According to the European Council’s conclusions from October 2014, we should expect to reach a 40% decrease of CO2 by 2030, in comparison to 1990 levels, whilst in the ETS sector we speak about – 43% in comparison to 2005. Again, for many less economically developed EU countries, this involves high investments and social and economic costs of transition.

Backloading and Market Stability Reserve (MSR)

We are convinced that EU ETS should work out as a market based mechanism, as it was supposed to be, and that any kind of superficial intervention could lead to harming its proper functioning. This is why we have serious doubts whether the backloading would be a useful tool, as well as intervention of the MSR prior to its launch of functioning. The proposal to increase the intake rate of MSR to 24% is unreliable and thus should not be taken into consideration. These kinds of interventions destabilise the system, provoke uncertainty for its participants and can seriously have an influence on the price of production for the sectors covered by ETS. As a result, such changes may increase risk of carbon leakage, which will finally be financed by the European consumers.

Linear reduction factor (LRF) not higher than 2.2%

We support the proposal of the European Commission which was endorsed by the ITRE Committee to hold the LRF not higher than 2.2%. As shown above, the 2020 goal will be exceeded by 6%, so speeding up the process of the reduction of allowances, will firstly and exclusively damage the economic growth. The European industry so far has been massively investing to modernise itself. For example, the ammonia production in Europe is leading by emissions and energy efficiency worldwide and higher LRF than 2.2% would ruin incentives for investment and would be treated as an additional taxation.

Moreover, the strengthening of the EU ETS, by increasing the LRF and MSR, would have significant impact on CAPEX – even up to 65 bln EUR, with an increase of wholesale electricity prices – between 12 and 20% – in Central European countries.

Derogation (art. 10c)

Taking into account the recent state of play of the EU ETS directive revision, we should recall the following suggestions concerning the Central Europe households, energy-intensive industry and power sector interests. Compensatory mechanisms shall be designed in the optimal way to: 1) limit electricity prices increase in the eligible Member States, 2) finance energy transition and 3) mitigate the security of supply issues (i.e. blackout risk in the 2021-2030 period). The free allocation should further support the modernisation of the existing plants and constructing new efficient ones

Therefore, it is indispensable to:

  • Move away from the Emission Performance Standards (EPS), which are limiting the scope of the eligible projects financed by derogation and Modernisation Fund. Amendments enacted in ENVI and ITRE committees, introducing such standards are contrary to the principle of technological neutrality and are hampering the environmental effect of the compensatory mechanisms.
  • Re-introduce the National Investment Plan as the only method of allocation for the eligible Member States contrary to open bidding.
  • Move away from a strict “incentive effect” definition – this effect should be defined as investment undertaken from 24th October, 2014. This date was indicated as the first (after the adoption of European Council’s conclusions) when investors obtained legitimate certainty that granting of free allocation will continue after 2020.
  • Increase the level of derogation to 60% in order to compensate costs of more ambitious approach. This measure aims at mitigating the increase in the ETS allowance price and associated additional compliance costs for the power sector in Member States with low GDP/capita levels facing a higher financial burden.

Modernisation Fund (art. 10d)

As a general rule, the Modernisation Fund should be technologically neutral:

  • The governance of the Modernisation Fund as well as the project selection process should be in the hands of beneficiary Member States. The beneficiary must decide about the selection criteria of the most appropriate projects. It is not acceptable that an advisory board composed by third parties, including the EIB or EBRD will take decisions, without of the final consent of the beneficiary. The role of the external parties has to be exclusively advisory. We support, therefore, the proposal endorsed by ITRE committee that the investment board shall take the decisions on investments.
  • Moreover, we call also for an increase of the level of the Modernisation Fund to 4% in order to compensate costs of strengthening the level of ambitions for lower income Member States.
  • As in the case of art. 10c, we opt for moving away from the Emission Performance Standard (EPS), which are limiting the scope of the eligible projects, which could be financed by Modernisation Fund.

Benchmarks

Benchmarks should be re-calculated before the start of the next phase of ETS on the basis of real industrial data and remain valid for the entire period to reflect real technological development. It should be based on actual verified performance and not on superficial flat-rate reduction factor. No arbitrary linear reduction factor should be applied to benchmarks.

Free allowances

Our world has become more and more competitive, with growing and expanding Asian economies challenging the competitiveness of the European industries. Due to technological restraints, not every branch of industry can achieve strict CO2 emission cuts requirements. A good example of technology limitations is the production characterised by high, unavoidable process emissions in fertilizer production. In this case, producers would be forced to transfer their production abroad (carbon leakage). This will weaken the EU’s economical position and increase unemployment rate.

Therefore, we call to grant such branches of the industry, particularly exposed to the carbon leakage, including the chemical and fertilizer, refineries, and steelworks,  100% free allowances until 2030.

CEEP key recommendations

CEEP supports the 2030 goals as defined by the European Council in October 2014, but argues that there is no need to make substantial changes (e.g. increase the levels) to the ETS, which will harm European power generation and abovementioned industries.

We believe that the EU will remain the unquestionable world leader in CO2 emissions reduction, without harming the development of EU industry and its competitiveness, particularly in the lower income Member States, whilst ensuring its energy security and limiting unemployment.

We opt for maintaining the balance between climate ambition and competitiveness by the proper distribution of allowances between auctioning and free allocation. It will avoid the carbon and investment leakages. Therefore, the compensatory mechanisms should be designed in an adequate way to address the beneficiary Member States’ challenges caused by the ambitious climate and energy policy. It means that the Modernisation Fund and derogation should be proportionally increased and the main decisive role (also in setting up the eligibility criteria) should be played by the beneficiary Member States.

Consequently, we call for the Members of the European Parliament on the eve of the plenary voting on the ETS reform, to reflect on our proposals and take into consideration the abovementioned position.

 

Central Europe Energy Partners’ (CEEP) position paper
on the proposal for a directive of the European Parliament and of the Council amending Directive 2003/87/EC
to enhance cost-effective emission reductions and low-carbon investments
Brussels, the 7th of February, 2017
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