Manufacturing industry braces itself for emissions allocation plan

The sector has very real concerns over the status of CO₂ produced in the calcining process, which account for roughly half of its total emissions. It claims there is "no technical potential" to reduce this process CO₂, and that this should be reflected in the allocation.

Process CO₂ is not covered by the sector's existing climate change agreement (CCA). This could be a barrier to the industry's hopes of opting out of the first phase of the EU trading scheme, as it may struggle to demonstrate that all its emissions are subject to equivalent control and reporting requirements.

The other main issue troubling the sector is the treatment of waste fuels. Under their existing CCA targets, cement companies are able to treat fuels such as tyres, industrial residues and waste paper as carbon-neutral. However, the Commission's draft guidelines would only allow this for certain biomass fuels.

"We'd like all waste chemical fuels to be classed as CO₂ neutral, and a wide definition of biomass is crucial for us," said Mr Leese. "If the Government wants to meet its waste targets - particularly for dealing with hazardous wastes - then we need to be promoting the use of these fuels in cement kilns." Indeed, the industry has a potentially important role to play in dealing with the UK's looming hazardous waste crisis - but much may depend on any carbon cost attached to waste (ENDS Report 345, pp 18-21 ).

Finally, the BCA expresses concern that the power generation sector may receive a generous allocation based on its emissions in the early 1990s. "This would both generate 'hot air' and be discriminatory," it warns.

"We have overcapacity in refining in Europe," Mr McPherson says, "and multinational companies will compare profitability, and decide where to focus investment and where to close refineries."

UKPIA supports a two-stage allocation based on average emissions over the five years to 2002. However, it wants the figures adjusted to reflect unplanned shutdowns, recent expansions and projections for "unavoidable increases" - particularly the requirement to reduce the sulphur content of petrol which is expected to increase refinery CO₂ emissions by 1.2 million tonnes.

 

Ian Rodgers, UK Steel's director, points out that there was "a huge dip" in emissions in 2002 because of plant closures, not least because of a blast furnace explosion at Port Talbot. "If we allocate emission permits without allowing for that, the industry will be dead in the water."

UK Steel is also worried about the impact on electricity bills, with some analysts predicting an increase of 50% or more in wholesale prices. "People seem to forget that the EU is operating in a competitive world - and there is a good chance that the Kyoto Protocol won't even be ratified," he said.

Graham Barnard of CPI insisted that "the Government has got to make allowance for industrial growth by 2010. I fear for the UK economy if we go for the 20% CO₂ target."

CPI warns that the trading scheme will be dominated by the electricity industry - and that "relatively small changes [in generators' allocation] and their subsequent commercial behaviour will have a major effect on the international competitiveness of other user sectors." It says that the electricity sector should accept stretching efficiency targets "to ensure that they do not just pass through to their customers the cost of emissions allowances that they need."

The paper industry is relying on a large growth in CHP capacity to meet its CCA targets - and shares concerns that the trading scheme may add to CHP's woes (see pp 6-7 ). "Unless DEFRA takes specific steps to recognise the abatement potential of CHP in the allocation, it could be the end of investment," warns Graham Barnard. Similar concerns are voiced by the Chemical Industries Association.

Finally, the sector is one of the few to call for restrictions on banking of allowances into the scheme's second phase. This "superficially attractive" option would, it says, "introduce too much uncertainty into the country's ability to meet its legally binding Kyoto burden sharing commitment."

 

However, there is a growing expectation that the sector will be brought formally into the scheme's second phase from 2008 - and the Chemical Industries Association sees "opportunities, in the medium term, to rationalise the currently complex and administratively burdensome climate change regime that exists in the UK."

The CIA's Nick Sturgeon says that allocation based on the 12.5% target might cost the industry perhaps £100 million per year in direct costs - similar to its climate change levy bill - and as much again in higher electricity bills. "It is vital," he says, "that the allocation protects the competitiveness of UK chemical manufacturers and minimises further barriers to growth."

The CIA wants each company to be able to negotiate its own target. It also says that DEFRA should reconsider the case for retaining the CCA's "relative", output-weighted targets under the EU scheme - and suggests that the Netherlands is proceeding with such an approach. As a fall-back, it supports a two-stage approach based on emissions in 1998-2002 but reflecting the sector's "growth premium over GDP and...early actions already taken".

The CIA argues that free allocation of allowances should be available for new plant and for expansion of capacity on existing as well as greenfield sites. "We don't feel that production expansion should be discriminated against as this will deter further investment in the UK," said Mr Sturgeon.