Memorandum submitted by the UK Petroleum
1. UKPIA is the trade association representing
the nine major oil refining and marketing companies in the UK.
Our members own and operate all nine major crude oil refineries
in the UK, supply over 90% of the inland consumption of petroleum
products in the UK, and export about a third of their production
to Europe, USA and Africa.
2. The UK has the 4th largest refining capacity
in the EU, processing 82 million tonnes per year of crude oil.
Between 5 and 7% of throughput is used as fuel to refine the crude
oil into products, and this is projected to increase as more energy
is required to supply the increasing demand for jet and diesel
fuels, as well as future tighter product specifications, such
as further reducing the sulphur in heating oils and production
of lower-sulphur marine fuels.
3. Refineries are stand-alone businesses
operating in global crude oil and product markets. Increasingly
refining companies are independent rather than integrated oil
majors, and three of UK's nine refineries are owned by companies
with neither exploration and production businesses, nor retail
4. UK and EU refineries need to be able
to attract large investment projects in order to adjust output
to meet changing demand. The EU is currently reliant on large-scale
imports of diesel and jet fuel from Russia and the Middle East,
and on large exports of gasoline typically to US, and these imports
and exports are projected to increase in a market where US consumption
is declining. The EU therefore needs to be able compete successfully
for large-scale investment projects to readjust refining output
to meet demand changes. If investment is not encouraged, the refining
supply to demand imbalance will increase (see figure 1).
INDICATIVE LEVELS OF UK REFINED PRODUCT SURPLUS/DEFICIT
5. This coincides with the traditional US
market for surplus gasoline disappearing as ethanol is added in
ever greater quantities to the demand pool (see figure 2).
INDICATIVE US GASOLINE DEFICIT/SURPLUS
6. UKPIA's views can be summarised:
Emissions trading is the best of the
currently available policy instruments for carbon-intensive industries
operating in a global market, and has clear advantages over carbon
Industries such as oil refining have
to compete internationally for investment, and want to be able
to do so on level terms with EU and non-EU locations. Hence UKPIA
favours a harmonised EU ETS over either UK-only policies or supplemental
UK or EU taxation.
- The flexibility to purchase credits for non-EU
reductions is an important way of achieving the same environmental
benefit at reduced cost to society, and should be maximised. Project
credits through the CDM provide a good way of funding low-carbon
investments in developing countries.
The EU ETS to date is a success. Although
EU ETS allowance prices have been volatile, credibility has been
established on how we measure, verify, report and trade allowances.
The cap has been delivered, and will continue to be delivered
with little damage to EU competitiveness. The likely future cost
of carbon has been established across all industry as a factor
to be considered in capital expenditure. The prospect of fewer
allowances in future and hence higher prices will increase the
attention given to GHG abatement.
7. In response to the questions posed by
Potential contribution of international emissions
trading in delivering a global greenhouse gas stabilisation target,
consistent with the UK's goal of limiting global warming to 2°C
Whether, and under what circumstances, emissions
trading ought to be supplemented or replaced by tax or regulation
8. An international emissions trading scheme
(ETS) has the potential to deliver a pre-determined "cap"
on the future total volume of emissions of GHGs at a minimum cost
to society. This is a great advantage over other policy instruments
such as taxation, where volumes of future emissions are uncertain.
9. A further advantage of ETS over taxation is
that it provides a means for industries exposed to international
competition (such as oil refining) to experience an incentive
to reduce emissions at the margin, while still providing a competitive
rate of return on investment compared with less regulated locations.
This is because the price of ETS allowances depends on supply
and demand and does not depend on the system of allocation, and
hence industries exposed to international competition can be given
free allowances until such a time as there is an international
agreement on policy instruments to control GHG, and the risk of
"carbon leakage" or "investment leakage" is
10. A tax would not be less complex that an emissions
trading scheme. For example, both a carbon tax and an ETS require
monitoring and verification of emissions and a compliant bureaucracy
to support it.
11. UKPIA believes that ETS is an appropriate
policy instrument for large energy-intensive industries, with
significant advantages over taxation. We strongly believe that
policy-makers need to choose between cap-and-trade or taxation,
and that to use both would discourage investment and lead to substitution
of domestic production by imports on a large scale.
12. We acknowledge that setting the "right
cap" is not easy. If it is set too tight the economy may
be damaged, and if it is set too loose there will be reduced abatement,
and there needs to be appropriate levels of abatement in the non-traded
sectors. However as more verified data is gathered and as other
policy measures take effect it should become easier to steer the
THE EU EMISSIONS
The record of Phase II of the EU ETS, and prospects
for the success of Phase III
Extent to which the carbon price will be sufficient
to drive low-carbon investment, in particular decarbonisation
Impacts of economic recession on the workings
of the EU ETS
Impacts on and responses by UK firms covered by
the EU ETS
Implications of the EU ETS for business competitiveness,
and how to address them
Effects of the expansion of the EU ETS to encompass
Allocation or auctioning of EU ETS credits, and
the use of auctioning revenues
13. Despite the volatility of the prices
of allowances, the ETS is a success because the cap has been delivered,
and will continue to be delivered. Credibility has been established
on how we measure, verify, and report emissions and trade allowances.
The likely future cost of allowances is a factor for all industries
to consider in their operational and capital planning and investment.
The design of the EU ETS allows industries exposed to international
competition to remain competitive and attractive locations for
investment, and it is vital to preserve this.
14. Decarbonisation of energy will be driven
by the cap and hence the likely future cost of allowances.
15. A great advantage of ETS is that the cap
will be delivered regardless of whether the economy is in recession
or not. In times of recession allowance prices are likely to be
reduced, and hence the cost to society is reduced.
16. The refining industry is very aware
of the EU ETS and the need to consider the likely future cost
of carbon in business planning. UK refineries emit significantly
less CO2 than the baseline established for Phase I by verified
historic emissions, despite the need for extra energy use to manufacture
fuels to the latest EU sulphur-free specifications.
17. The incentive to invest to reduce emissions
is provided by the likely future price of allowances, and is not
dependent on how these allowances are allocated. Until there is
a global agreement on carbon reduction policies the EU has correctly
decided to issue allowances free to industries exposed to international
competition and carbon leakage. In this way the ETS has succeeded
in providing clear incentives to invest to reduce emissions, without
unnecessary damage to competitiveness. Those reductions which
can be made benefit from the full value of carbon. It is important
to maintain this policy.
18. The expansion of the ETS to include
aviation will provide a similar incentive to airline operators
to reduce emissions. If demand for jet fuel continues to increase
within a given cap, there will have to be compensatory decreases
in carbon emissions elsewhere.
19. Auctioning of allowances (like a carbon
tax) does much more than provide an incentive to reduce emissions
at the margin. It has a huge and direct impact on cash-flow. In
some industries it may be possible to pass the cost on to the
end-consumeras it largely the case for the electricity
supply industry. However, in industries which are exposed to international
completion and import substitution, such as oil refining, the
ex-refinery product prices are set by the global market, and whether
or not there is cost pass-through the remuneration on investment
at EU refineries will be much less than at comparable non-EU facilities.
UKPIA is strongly against auctioning of allowances to exposed
industries until comparable policies are implemented at non-EU
facilities. The use of auctioning revenues is a matter for national
Progress of cap and trade schemes in other countries
(notably, the United States), and the prospects for, and practicalities
of, linking between them
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
20. The development of a global carbon market
is to be encouraged as a means of capturing environmental benefits
at the least cost to society. As more jurisdictions adopt carbon
markets or other mechanisms to price carbon, the need for exposed
industries to be protected will decrease.
UK CARBON BUDGETS
The relationship between emissions credits and
the UK carbon budgets set up under the Climate Change Act
Transparency of and justification for counting
the purchase of emissions credits (especially from "offset"
schemes) as decreasing emissions from the UK
21. It is key that the UK Carbon Budget
remains consistent with the overall targets of the EU ETS. This
is essential given the global nature of the oil refining business,
UK refineries have to compete with others in the same corporation
for investment in order to remain competitive and meet changing
22. The proposed Carbon budget for the period
2018-22 in the traded sector is 800 tonnes, equivalent to 160
tonnes/year in 2020. The stated aim of the ETS is to reduce CO2
by 21% versus 2005 level. According to DEFRA the cap was 215 mteCO2
in 2005 hence 21% reduction would be 170mte CO2, some 10mte above
the Carbon budget. However, the CCC recommend that there "should
be no limit on the extent to which the UK could meet its budgets
via the purchase of European Union Allowances" ie for the
traded sectors, allowances purchased through the ETS are valid;
it is only in the non-traded sector that trading is limited.
23. It is also important that any additional
burden (eg from increasing aviation emissions which may have to
be compensated by reductions elsewhere within the ETS) is evenly
spread and not disproportionally allocated to the refining sector.
24. In order to deliver the reductions in
the most cost effective way, we would encourage flexibility to
count the purchase of emission credits (& offset schemes)
as decreasing emissions from the UK in a transparent way. A mechanism
for this could be a register similar to that used to trade the
existing EU ETS allowances.