The role of carbon markets in preventing dangerous climate change - Environmental Audit Committee Contents

Memorandum submitted by the British Cement Association


    — Early action has been taken by the cement industry to tackle climate change. Between 1990 and 2007, the BCA member companies have reduced direct CO2 by 27%. 2007 emissions were 3.7MtCO2 lower than 1990.— The current policy mix is complex and further regulation and taxation are not necessary.— International emission trading is needed on a global scale to avoid imbalance in the market bought about by the asymmetric carbon tax from emissions trading.

    — The prospects for Phase III of the EU ETS could be disastrous for the UK cement industry if the sector is not listed as competitively impacted and provided with sufficient free allocation.

    — The most recent research puts the loss, to non-carbon constrained economies, of UK cement manufacturing in 2020 at 100%, at a carbon price of €25/tCO2 with no free allocation and no equalisation measures.

    — The international agreement due to be negotiated in Copenhagen (COP15) needs to provide equivalent measures in the signatory countries.

    — The international agreement on climate change should include criteria to ensure an equal carbon price is applied to those activities regulated by the EU ETS. Criteria should include penalties, monitoring/reporting and implementation and enforcement of regulation.

    — Encourage best practice by using benchmarking because positive measures are more likely to be accepted in a globally linked trading system.

    — Benchmarking provides the least cost optimal method for promoting technological change and development of cleaner technologies within the manufacturing industry.


  2.  The British Cement Association is the trade and research organisation that represents the interests of the United Kingdom's cement industry in its relations with Her Majesty's Government, the European Union and relevant organisations in the United Kingdom. The members of the BCA (Castle Cement, Lafarge Cement UK, CEMEX UK and Tarmac Buxton Lime and Cement) are the major domestic manufacturers of Portland Cement, producing over 90% of the cement sold in the UK. Additionally, BCA supplies services concerning climate change issues to Quinn Cement.

3.  Energy represents an increasing proportion of the variable costs of cement manufacture (35% to 40%) and it is therefore a primary concern of the industry to take all cost effective measures to improve energy efficiency and thereby reduce its emissions of carbon dioxide.

  4.  Through their parent companies, Lafarge Cement UK, Castle Cement, and CEMEX are committed to carbon reductions through the World Business Council for Sustainable Development Cement Sustainability Initiative, (WBCSD CSI). In addition, Tarmac Buxton Lime and Cement has undertaken to adopt the commitments within the WBCSD CSI.

  5.  Through considerable early action involving significant expenditure on new plant, BCA's member companies have reduced their direct carbon dioxide emissions by over 27% between 1990 and 2007.[17] In 2007 the annual CO2 emissions were 3.7 million tonnes lower than in 1990.


7.  Potential contribution of international emissions trading to delivering a global greenhouse gas stabilisation target, consistent with the UK's goal of limiting global warming to 2°C

  7.1  International emissions trading will play its part in stabilising GHG emissions, however, only if the international emission trading is on a truly global scale. Thus far, the balance of effort has been placed on industrial point sources and power generation, but all sectors of the economy will need to contribute to mitigating and adapting to climate change. Although the efforts of the UK are important, it is vital that emissions targets in the UK are not simply met by importing a greater amount of products because this will do nothing to help limit warming to 2°C.

8.  Whether, and under what circumstances, emissions trading ought to be supplemented or replaced by tax or regulation

8.1  BCA contributed to the Committee inquiry[18] in 2007 that investigated the overlaps between the existing Climate Change Levy tax and related legislation. The EAC correctly recognised that simplification is needed in the UK's climate change policy arena. As such, any proposal for additional regulation/tax on carbon or fuels associated with cement manufacture would be unnecessary, duplicative and not follow the aims of "Better Regulation". Emission trading within a cap will always limit emissions to the value of the cap set and thus other regulation or tax is totally unnecessary. These other regulations and taxes should be applied to those sectors or areas of emissions not covered by the Emission Trading Scheme.

9.  The record of Phase II of the EU ETS, and prospects for the success of Phase III

9.1  It is too early to speculate on the effectiveness of Phase II of the EU ETS. However, the UK cement industry experience with the allocation process for Phase II has been a mixed one. The use of both "grandfathered" historical emissions data and benchmarking to set allocation levels for Phase II has created an inequitable distribution within the sector.

9.2  The prospects for Phase III could be disastrous for the UK cement industry if the sector is not listed in the group related to Article 10a of the Directive amendment proposal[19] following the assessment of the European Commission, related to potential "carbon leakage".

9.3  Free allocation to minimise carbon leakage should be distributed using a single common methodology, in the case of the cement industry this should be a benchmark method based on the clinker production (the CO2 emitting intermediate of cement).

  9.4  Having said that; we repeat the comment from above, namely the trading schemes will restrict emissions to the cap set and thus, in limiting CO2 emissions from the sectors covered, it will be successful.

10.  Extent to which the carbon price will be sufficient to drive low-carbon investment, in particular decarbonisation of energy

  10.1  Currently, there is an absence of international agreement on climate change that provides equivalent treatment of cement companies and those supplying competing materials on a global basis. Until this gap in the system is addressed then any locally applied carbon price will only disadvantage local production. Whilst we recognise that protectionist measures such as "border tax adjustment" are not desirable under the present economic climate, there is a need to promote Sustainable Production and Consumption[20] and part of this is to support locally sourced and supplied materials.

10.2  As described in the introduction, the cement industry has made significant improvements in its carbon dioxide emissions, a performance that surpasses the UK as a whole. However, there are limitations to what can be done by the decarbonisation of energy. It should be noted that the CO2 emissions from cement manufacture comprise of emissions from the fuels burned in the kiln, ("fuel CO2") and these account for around 40% of the direct CO2 emission. The decomposition of limestone during the "calcination" process ie the chemical reaction of calcium carbonate (CaCO3) to calcium oxide (CaO) releasing CO2, ("process CO2") accounts for the remaining 60%. The process emissions are essentially irreducible and there is no foreseeable technological breakthrough that will remove this fundamental process emission in commercial cement manufacture. Consequently, even if sufficient biomass fuel sources were available to reduce the fuel component to a net emission of zero, the total emissions of CO2 would only be reduced by 40%.

  10.3  Carbon Capture and Storage is yet to be technologically proven in the cement industry but may be a long-term abatement option. IEA GHG[21] have estimated that a post-combustion capture fitted cement plant could cost around €558 million (more that twice the cost of a non-CCS equivalent) but providing a potential emissions avoided efficiency[22] of 77%. An equivalent output oxy-combustion plant, however, could cost €327 million (25% more expensive than the non-CCS plant) but at an emissions avoided rate of 52%. Although the oxy-combustion option sounds more economic the technical barriers are much greater and will require a fundamental redesign of the kiln system. Moreover, industrial scale CCS in the UK cement industry will not take place until there is a fully developed transport and storage network, the development of this will need HM Government financial support. Hypothecated auction revenues are a potential source for central infrastructure funding.

  10.4  Grant and funding availability for industrial CCS will help to promote the construction of a pilot plant. Pilot and demonstration scale plants will be crucial to further the knowledge in the cement sector and ultimately provide evidence for the speed at which CCS can be universally deployed, if proven to be technically and economically possible.

11.  Impacts of economic recession on the workings of the EU ETS

  11.1  The economic downturn has been reflected in the EU ETS carbon price for Phase II. However, BCA does not support proposals for a price floor, BCA believes that the market should set the price and this will assist carbon abatement at the lowest point of cost. The fundamental principle of emissions trading is meeting the cap by the least cost method. Evidently it is easier to meet the cap at a time of recession, under low carbon prices: the corollary is that in times of growth more effort is needed, but of course at a time of expansion, more money is available for investment in low-carbon technology. Emission trading works in parallel with the economic cycle and intervention is unnecessary once the caps have been set at the correct level; challenging but not punitive.

12.  Impacts on and responses by UK firms covered by the EU ETS

12.1  The cement industry is facing an unprecedented trading period, where deliveries of cement in Great Britain fell by over 14% in 2008. This means that any carbon costs that are faced by domestic manufacturers that are not faced, in equal measure, by non-EU suppliers' puts the UK domestic supply at risk of carbon leakage. At present 10% of the UK market construction market is supplied by imported material, estimates suggest that the additional emissions from transport of this material could add a further 10% to the carbon footprint of the delivered cement.

13.  Implications of the EU ETS for business competitiveness, and how to address them

13.1  Carbon-efficient manufacturing must clearly be encouraged, whilst carbon leakage and the relocation of manufacturing outside the EU must be prevented. Otherwise the environmental objectives of the EU ETS would be undermined along with the local manufacturing base. A right balance should therefore be sought between the requirements of an "international agreement" and the targets that EU authorities impose on European industry.

13.2  Free allocation to sectors subject to carbon leakage does not stop emission trading from functioning effectively. Emissions will still be at or below the cap; thus free allocation should continue for those sectors until a fully global scheme is in operation.

  13.3  Independent authors[23], [24] have identified the cement sector as potentially competitively impacted by an increased use of auctioning in the EU ETS. The most recent research[25] puts the loss, to non-carbon constrained economies, of UK cement manufacturing in 2020 at 100%, at a carbon price of €25/tCO2 with no free allocation and no equalisation measures.

  13.4  In order to prevent such losses a great deal of emphasis has been placed on reaching an international agreement at the UN Conference of Parties in Copenhagen in 2009. With regards to the International Agreement, it must ensure that comparable constraints are imposed on all countries to provide a level playing field and an unbiased market for all manufacturers.

  13.5  An international agreement which includes energy-intensive industries exposed to a significant risk of carbon leakage, or a sector specific international agreement that captures such industries, must comply at least with the following criteria, in order to provide a level playing field at installation level in such industries:

13.5.1the participation of countries representing a critical mass of production;

13.5.2equivalent CO2 emission targets with equivalent effects by 2020, at the latest, imposed upon all participating countries; and

13.5.3an effective international monitoring and verification system.

  13.6  In addition:

13.6.1in countries with non-equivalent CO2 emission targets, measures with equivalent effects should be imposed upon the same sectors, by 2020 at the latest, to those covered within the European Union Emission Trading Scheme; and

13.6.2the implementation of measures by the EU to include importers from countries not covered by the agreement; and

13.6.3materials in competition have to be subject to equivalent restrictions taking into account life cycle aspects.

  13.7  We believe that the most effective way to achieve CO2 emission reductions, in energy intensive industries at risk of carbon leakage, is by free allocation based on benchmarks which encourage CO2 reduction and ensure a level playing field. The EU should also provide more details on its "critical success criteria" and terms and conditions for accepting an international agreement. This is important because a number of measures planned in the proposal for a revised ETS are only applicable upon the conclusion of an international agreement, but not necessarily its implementation. In order to provide predictability for EU business and a global "level-playing field", it is vital that the nature of the terms and conditions of an international agreement are well defined.

14.  Effects of the expansion of the EU ETS to encompass aviation

  14.1  Whilst we recognise that all sectors of the economy need to play a role in tackling climate change, the inclusion of aviation in the EU ETS will not lead to any significant emissions savings in this sector, as emissions are projected to rise significantly. As such, compliance in the aviation sector in the EU ETS will be delivered by purchasing allowances from other sectors, adding to the pressure that already exists in the manufacturing sector. Transport; aviation, shipping, rail and road have unique characteristics that lend themselves to a separate trading system dedicated to transport emissions. Many of the issues differ from those sectors such as cement that are subject to international competition from imported goods. Importantly emissions from these transport sectors continue to rise and the cement industry view is that these sectors should contribute to climate change mitigation.

15.  Allocation or auctioning of EU ETS credits, and the use of auctioning revenues

15.1  UK manufacturers regulated by the EU ETS must be given the opportunity to compete equally with suppliers in non-carbon constrained countries. Equivalent treatment for EU and non-EU states must be in place before our industries are required to buy CO2 allowances at auction. Without "equalisation", emissions will simply move off-shore, taking our domestic industry and jobs with them and allowing non-carbon constrained economies to exploit this competitive advantage. The cement industry needs to know now that they will be listed as competitively vulnerable to imports so that investment can resume and continue to maintain a healthy domestic manufacturing economy. In the absence of an international agreement that delivers equitable treatment of global cement manufacturers and potential exporters to the UK then free allocation is the only acceptable methodology. In the interim, until equivalent treatment in CO2 cost burden can be observed on a global basis, CO2 allocation should be based on free allocation using performance based methods such as "benchmarking". Benchmarking provides the least cost optimal method for promoting technological change and development of cleaner technologies within manufacturing industry whereas auctioning promotes change at the highest cost. However, careful consideration needs to be taken when designing benchmark methodologies so as not to penalise "best in class" technologies; so as not to provide unachievable technological transfer timetables for those below the benchmark standard; and, not disincentivise investment.

16.  Progress of cap and trade schemes in other countries (notably, the United States), and the prospects for, and practicalities of, linking between them

16.1  In principle linking is a good thing but there should be equivalence in every aspect of the linked system. Such as:16.1.1Overall absolute emissions reduction.

16.1.2Equivalent monitoring, reporting and verification.

16.1.3Equivalent regulation, implementation and penalties for failure.

16.1.4Equivalent cost for the traded sector ie equivalent carbon cost.

16.1.5Equivalence in the reduction trajectory for the traded sector.

16.1.6Inclusion of activities listed in Annex I of the EU ETS directive.

  16.2  Importantly, whilst countries such as the USA and others are becoming more interested in GHG trading, BCA recognises that it is India, China, Indonesian and north African countries that are gearing up to export to Europe with products that do not have to account for their CO2.

17.  The robustness and effectiveness of "offset" schemes (ie those without a cap), such as the Clean Development Mechanism (CDM), and the issues around linking them to cap and trade schemes

  17.1  CDM and JI, must be retained and their operation simplified. Today the credits from project mechanisms may represent a small volume of CO2 but in the future, they may come to play a significant role in helping developing countries with cleaner technologies or other solutions to reduce GHG emissions. In order to allow this development, potential investors in such mechanisms must not be deterred by any limitation upon the conversion of credits into allowances. They should, on the contrary, be encouraged by the simplification of procedures. The objective of a trading scheme is to encourage the implementation of the most cost effective ways of providing the required reductions. Project credits such as Certified Emissions Reductions (CERs) are an important tool to achieve emission reductions and encouraging the practice of reducing emissions through investment in parts of the world where this would not be a normal priority.

18.  The relationship between emissions credits and the UK carbon budgets set up under the Climate Change Act

18.1  Government should ensure that through its budgets and targets that real action on climate change is taken. In doing so it should ensure that "carbon leakage" does not occur that results in an apparent reduction in carbon dioxide in the UK but increased carbon dioxide for example from manufactures supplying goods to the UK. We are fortunate in the UK to have a domestic cement manufacturing industry that supplies 90% of UK consumption from domestic manufacture, although this picture could change if the full costs and benefits are not assessed. An international agreement on climate change is critical to ensure domestic manufacturers are not disadvantaged for their early action.

18.2  At present the budgets[26] proposed by the Committee on Climate Change are vague. The effort required from manufacturing industry is aggregated and the main GHG emitting manufacturing industries such as cement have not been made aware of their expected contribution.

19.  Transparency of and justification for counting the purchase of emissions credits (especially from "offset" schemes) as decreasing emissions from the UK

  19.1  GHG reductions should be made at the lowest point of cost, wherever this may be. The ability for companies to purchase credits from those who can more easily and cheaply make reductions should be encouraged, as this will help to spread the influence of emissions trading to become a significant driver in the challenge against harmful climate change.

March 2009

17   "Direct carbon dioxide emissions equate to emission from the cement kilns, and exclude (indirect) emissions associated with the generation and transmission of the electricity used in manufacture. Back

18   Environmental Audit Committee. Reducing Carbon Emissions from UK Business: The role of the Climate Change Levy and Agreements. Second Report of Session 2007-08. Back

19   Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading system of the Community-Outcome of the European Parliament's first reading (Strasbourg, 15 to 18 December 2008). Back

20   Sustainable Consumption and Production Indicators Joint Defra/DTI consultation paper on a set of "decoupling" indicators of sustainable development. Back

21   IEA Greenhouse Gas R&D Programme (IEA GHG), "CO2 Capture in the Cement Industry", 2008/3, July 2008. Back

22   Based on emissions avoided including power import and exports. Back

23   Differentiation and Dynamics of EU ETS Industrial Competitiveness Impacts. Authors: Jean-Charles Hourcade, Damien Demailly, Karsten Neuhoff, and Misato Sato. Contributing Authors: Michael Grubb, Felix Matthes and Verena Graichen. Climate Strategies 2007. Back

24   EU ETS impacts on profitability and trade: A sector by sector analysis. Carbon trust 2008. Back

25   Assessment of the Impact of the 2013-20 ETS Proposal on the European Cement Industry. Boston Consulting Group 2008. Back

26   Building a low carbon economy-the UK's contribution to tackling climate change. Committee on Climate Change. December 2008. Back

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