Memorandum submitted by INEOS ChlorVinyls
1. EXECUTIVE
SUMMARY
1.1 INEOS ChlorVinyls is a major chemicals
company operating throughout Europe. The company is the only manufacturer
in the UK of Chlor-Alkali products—chlorine, caustic soda
and chlorinated derivatives.
1.2 Chlorine manufacture is very energy intensive,
and therefore emissions intensive. However, because the majority
of the energy used is electrical, most of the emissions are indirect.
1.3 We have provided data to the UK Government
that proves that without such compensation, the chlor-alkali industry
in the UK cannot survive, and that carbon leakage will occur.
1.4 The draft EU ETS Phase 3 Directive includes
no harmonised mechanism to compensate exposed sectors for the
cost of indirect carbon emissions passed on via electricity prices,
and has left the matter of compensation to individual governments.
1.5 This means that exposed sectors do not
have the certainty they need to underpin business decisions and
there is a risk different levels of support across the various
member states will distort competitiveness.
1.6 We are therefore calling upon HM Government
to give assurances that—assuming we can show we meet the
criteria for compensation as laid down in the Directive—
the Government will provide such compensation, and that the level
of compensation will be no worse than that received by our competitors
in other member states.
2. THE EFFECT
OF EMISSIONS
TRADING UPON
THE UK CHLOR-ALKALI
INDUSTRY
2.1 INEOS ChlorVinyls is a major chemical company
operating throughout Europe. The company is the only manufacturer
in the UK of Chlor-Alkali products—chlorine, caustic soda,
chlorinated derivatives.
2.2 Chlorine manufacture is very energy intensive,
and therefore emissions intensive. The majority of the energy
is used as electricity, so most of the emissions are indirect.
2.3 Under Phase 3 of the EU ETS, electricity
generators will have to buy all of their allowances at auction.
They will be expected to pass the carbon costs associated with
indirect emissions onto their customers.
2.4 The draft Directive provides that energy-intensive
industries, which meet the criteria demonstrating that they are
at risk of carbon leakage, will be allocated free allowances covering
(notionally) all of their direct emissions.
2.5 The original draft Directive (23 January
2008) had no provisions to compensate electro-intensive industries
that are heavily exposed to the cost of indirect emissions that
will be passed onto them in electricity prices.
2.6 Because chlor-alkali manufacture consumes
so much electricity, the cost of indirect emissions would increase
the cost of production by more than 10% of turnover. This is well
in excess of profit margins earned by the sector in the last five
years, so unless these costs can be mitigated, they will wipe
out industry margins and, in due course, the industry itself.
Mitigation can be done either by passing costs onto customers
or by compensation via an agreed mechanism in the EU ETS Directive.
2.7 Caustic Soda and chlorine derivatives such
as Ethylene Dichloride (EDC) and Polyvinyl Chloride (PVC) are
internationally traded. It can be shown that selling prices in
the various global regions move in tandem and it will not be possible
to raise prices in Europe to recover increased costs without prompting
imports from other regions. Consequently, in the absence of a
global climate change accord, it will not be possible to pass
on costs to customers.
2.8 Prior to the current economic downturn,
European demand for chlor-alkali products was growing at 1% per
annum. It can be expected that this growth rate will return once
the economic recovery commences.
2.9 There are three main technologies for making
chlorine—membrane, mercury and diaphragm. Diaphragm technology
is little used in Europe, but the other two technologies are widespread.
Mercury technology is less energy efficient than membrane technology,
and it also gives rise to mercury emissions to the environment.
Because of this, European chlor-alkali manufacturers have committed
to phasing out mercury based production by 2020.
2.10 Total European chlor alkali production
capacity is approximately 11 million tonnes per annum. Of this,
approximately 4 million tpa is mercury based. Since the demand
will still exist, this capacity will have to be replaced somewhere
in the world by 2020.
2.11 If European producers cannot make an acceptable
return on their investment, the new capacity will not be installed
in Europe—it will be installed in countries such as the
USA, Russia, Saudi Arabia or China that do not have similar carbon
constraints.
2.12 Because of the difficulty of transporting
chlorine, most chlor-alkali production sites in Europe are vertically
integrated, with the chlorine being converted into derivative
products at the site of production.
2.13 For this reason, if chlorine manufacture
moves outside Europe, it is inevitable that the manufacture of
derivative products will follow it.
2.14 China will soon have an massive excess
of both chlorine and PVC capacity over domestic demand. Chinese
electricity is mostly coal-derived, and therefore the carbon intensity
of Chinese chlorine is approximately double that in the UK.
2.15 Chinese PVC is mostly produced via the
acetylene route, whereas PVC produced in Europe is produced from
ethylene. Acetylene is produced from calcium carbide which is,
in turn, produced from coal and limestone. The process is very
energy intensive, and it also gives rise to process CO2 emissions.
Because of this, Chinese PVC has nearly five times the carbon
intensity of that produced in the UK.
2.16 In summary, solely from a carbon standpoint,
it is sensible that chlor-alkali products for consumption in Europe
should be produced in Europe. Global emissions will increase significantly
if this production is incentivised to move outside Europe,[43]
even when emissions associated with shipping those products back
to Europe are ignored.
2.17 Chlorine and caustic soda both are key
building blocks of the modern chemical industry. If chlor-alkali
manufacture moves outside Europe, it will inevitably lead to the
demise of large sections of the European chemical industry, with
significant loss of employment opportunities and significant loss
of revenues to the Treasury.
2.18 An independent report produced in 2001
for the DTI showed that approximately 133,000 UK jobs are directly
or indirectly dependent upon INEOS Chlor's Runcorn Site. Directly
and indirectly, the Site contributes £1.6 billion/yr (2001
currency) to the Treasury. Similar analyses could, no doubt, be
produced for many of the other chlor-alkali sites in Europe. There
are 84 of these in total.
2.19 It is evident that the environment, many
regional economies and several national Treasuries will all suffer
if chlor-alkali manufacture is forced to relocate outside Europe.
2.20 However, such relocation will be inevitable
if there is no mechanism in Phase 3 of the EUETS to compensate
electro-intensive industries for the cost of indirect emissions
that will be passed on via electricity prices. Many sites will
be forced to close immediately upon commencement of Phase 3.
2.21 The Chlor-alkali industry has argued that
compensation should be provided by allocating additional free
allowances to electro-intensive sectors that meet the agreed criteria.
The quantity of allowances would be determined by benchmarking.
The allowances would be drawn from the pool of allowances earmarked
for auctioning to the electricity generators. The affected sectors
would then sell these allowances to the generators and use the
proceeds to offset their higher electricity prices. This mechanism
would put electro-intensive sectors onto the same basis as other
energy-intensive sectors. The electricity generators would be
essentially neutral to the arrangement, and the only "losers"
would be the national Treasuries.
2.22 Indirect emissions associated with chlorine
manufacture are approx 900,000 te/yr. Assuming a carbon price
of €40/te, the cost of these emissions is €36m/yr. This
is less than 2% of the Treasury revenues that are directly or
indirectly dependent upon the chlorine industry.
2.23 The arguments summarised in paragraphs
2.6 to 2.22, together with a large amount of supporting information,
have been complied into a dossier that was presented to the UK
Government in the summer of 2008. This can be made available to
the EAC if required, but it is commercially sensitive.
2.24 We can report that the UK Government seems
to be persuaded by our arguments. Similarly, other Member States
(particularly Germany, Italy, the Netherlands) have argued for
compensation for indirect emissions for electro-intensive industries,
but we understand some other Member States (essentially those
without chlor-alkali or aluminium industries) were opposed to
the idea.
2.25 During the final negotiations on the Revised
EU ETS Directive in November and December 2008 a compromise was
reached. Article 10(a)(6) was inserted into the final Draft Directive
(issued 17 December 2008). This provides that member states "may
also adopt financial measures in favour of sectors [...]determined
to be exposed to a significant risk of carbon leakage due to (emissions)
costs passed on in electricity prices, in order to compensate
for those costs and where this is in accordance with state aid
rules ..."
2.26 Whilst this outcome is better than nothing,
the European chlor-alkali industry believes it is far from ideal
for the following reasons.
2.27 Under the industry's proposed mechanism
(see paragraph 2.21) electro-intensive industries would be allocated
additional free allowances by right, and this would give businesses
sufficient certainty to enable them to make valid investment decisions.
Under the Commission's proposed mechanism, compensation will not
be given by right, and it is instead left to each Government to
make its own decision to compensate or not. Furthermore, this
decision can be reversed at any time, thus depriving businesses
of the certainty that they need to underpin investment decisions.
2.28 One major objective of the design of EU
ETS Phase 3 is to ensure maximum harmonisation across all Member
States. This would achieve a level playing field by eliminating
distortions in competitiveness. The industry's proposed mechanism
was consistent with the principle of harmonisation. The Commission's
proposed mechanism is totally inconsistent with this principle.
2.29 INEOS ChlorVinyls very much appreciates
the support given by the UK Government to date on this issue.
However, we are aware that the support is not unanimous amongst
Government departments, and that things can change.
2.30 The purpose of this evidence is to bring
this issue to the attention of the EAC. We believe that is essential
that the UK Government takes seriously this threat to the UK Chlor-alkali
industry, and takes positive action now to address it.
2.31 The minimum action required of Government
is as follows:
— Give a firm assurance that it will give
financial support to the industry in accordance with any guidelines
laid down in the Directive, subject to the industry demonstrating
at a pan-European level that it meets the criteria to qualify
for such support.
— Give an assurance that the level of support
in the UK will be no worse than that enjoyed by our competitors
in other Member States with significant chlor-alkali industries,
vis-à-vis Germany, France, Italy, Spain and the Netherlands.
26 February 2009
43 European PVC production capacity is approximately
8 millions tonnes/annum. This happens to be exactly equal to the
excess PVC production capacity that will exist in China 2010.
If all the European capacity were to be replaced by production
in China, global emissions would increase by 55 million te CO2/annum. Back
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