Manufacturing industry braces itself for emissions allocation plan

Companies coming under the EU emissions trading scheme are eagerly awaiting the Government's draft national allocation plan. Their main concern is how the overall cap and approach to allocation will affect the competitiveness of both sectors and individual companies - but other key issues concern the treatment of biomass, waste-derived fuels, process CO2 emissions, new entrants and combined heat and power (CHP).

The Government is expected to issue the draft plan in mid-December. The timing is likely to be linked to the pre-Budget report, which is expected to set out how companies entering the EU scheme will be treated under the climate change levy.

One of the key decisions will be whether the UK bases the overall allocation on its Kyoto Protocol target to reduce all greenhouse gases by 12.5% by 2010, or on its tougher domestic target for a 20% reduction in CO2 emissions (ENDS Report 340, pp 5-6 ).

The Environment Department, backed by a coalition of environmental groups and renewable energy trade bodies, favours the second approach on the grounds that it is consistent with the aims of this year's energy White Paper. However, ENDS understands that the Treasury and the Department of Trade and Industry are sympathetic to strong lobbying from industry for the 12.5% target. A real, if unsatisfactory, possibility is that the draft plan may defer the decision by expressing companies' allocations as shares of the total rather than in absolute terms.

Industry's responses to DEFRA's consultation on allocation (ENDS Report 343, pp 38-39 ) reveal several common themes. Most trade associations back allocation based on average emissions in 1998-2002, with general support for a two-stage approach in which allocations for individual installations are derived from a sectoral cap. Most argue that a pool of allowances should be set aside for new entrants, with operators retaining allowances when plants close.

A common concern is the robustness of emissions data gathered by DEFRA's consultants and of the DTI's energy projections. Another important issue is the detailed rules on monitoring and reporting of emissions. The European Commission is expected to publish guidelines in late November, but some in industry have been alarmed by the high level of accuracy sought in early drafts.

Key points raised by the main sectors include:

  • Cement and lime: The British Cement Association warns that UK producers are exposed to competition from imports, mostly from other states falling under the trading scheme. It was unable to achieve a consensus view on allocation methodologies. "Each of our member companies would probably like a different method or base year depending on their investment cycle," said BCA's Richard Leese.

    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.

  • Oil refineries: "Setting a stringent cap in the UK will lead to a marginal increase in the carbon price, with the second order effect of increasing the incentive to abate across Europe," says Ian McPherson of the UK Petroleum Industry Association. "But it would have a direct impact on the cash flow and profitability of UK companies when the refining side is already struggling to break even."

    "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.

  • Steel sector: Unlike other sectors, UK Steel wants DEFRA to base its allocation on expected emissions in 2005-7, using the CCA targets as a yardstick. The industry is well ahead of its targets so far, but Corus' CCA target is currently being renegotiated (ENDS Report 339, pp 23-26 ).

    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.

  • Pulp and paper: The Confederation of Paper Industries argues that the industry is very exposed to international competition, with imports accounting for some 60% of the UK paper and board market.

    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."

  • Chemicals: The degree to which the chemicals sector will be affected by the first phase of the scheme remains uncertain, thanks to a dispute between the European Commission and the Government over the definition of "combustion plant" (ENDS Report 345, p 5 ).

    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.

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