Memorandum by the British Cement Association
THE UK CEMENT
INDUSTRY
1. The British Cement Association represents
the United Kingdom's cement industry in its dealings 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 and together
produce over 90% of the cement sold in the UK. Additionally, BCA
works with Quinn Cement on climate change issues in relation to
its operations in Northern Ireland.
2. Cement and concrete are essential to
economic and social development. A healthy domestic industry is
integral to the UK's competitiveness and the most sustainable
way to supply the market. Current EU ETS proposals seriously threaten
this.
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
throughout the world as demonstrated by their commitment to 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 early action and substantial
expenditure on new plant, BCA's member companies have reduced
their direct[2]
carbon dioxide emissions by nearly 28% between 1990 and 2007.
In 2007 the annual CO2 emissions were over 3.7 million tonnes
lower than in 1990.
6. SPECIFIC INQUIRY
QUESTIONS
7. LEVEL OF
EMISSIONS REDUCTIONS
8. The proposed level of emissions reductions
and the automatic change from 20% to 30% should an international
agreement be reached.
8.1 Proposed level of emissions reduction:
The cement industry agrees that the EU must make meaningful reductions
in its greenhouse gas emissions during Phase III of the EU ETS
and beyond. However, these reductions should take account of the
action taken to date, and the potential for further reductions.
The current proposal does neither.
8.2 Targets set for the traded sector are
a 21% reduction on 2005 levels by 2020, and only 16% for the non-traded
commercial and domestic sector. However, the traded sector has
already made substantial reductions based on 1990 levels, whilst
parts of the non-traded sector such as motor transport have actually
increased in this period.
8.3 By 2007, the UK cement industry had
reduced its emissions by nearly 28% through the installation of
new plant and the closure of inefficient plant whilst supplying
90% of UK consumption from UK production. However, the potential
for further reductions through conventional technology is limited.
8.4 BCA believes that there should be a
better balance between the traded and non-traded sector ensuring
that the non-traded sectors do more to tackle climate change.
By redressing the balance a broader understanding and responsibility
will be acknowledged by those areas of the economy that have to
date, been required to contribute very little to climate change
mitigation.
8.5 International Agreement: With regard
to the triggering of a 30% reduction target, the Commision's proposal
is unclear in three aspects.
8.5.1 the meaning of the term "international
agreement";
8.5.2 the criteria for assessing when an
international agreement has been reached; and
8.5.3 the point at which the target is increased
from 20% to 30%,
8.6 There needs to be greater clarity on
all of these issues. The "conclusion"[3]
of an international agreement by the European Community is likely
to introduce distortive effects on product markets of EU manufacturers
unless there is a clear timetable including the introduction of
measures by all participants to the international agreement where
the increased EU targets are linked to the delivery of milestones
in other nations and the agreement covers a critical mass of Annex
I activities.
8.7 If an agreement is reached during the
Phase III period, the EU should consider whether this agreement
is equivalent in respect of.
8.7.1 Overall absolute emissions reduction.
8.7.2 Effort sharing/Reduction commitment
of the traded sector.
8.7.3 Equivalent cost for the traded sector
ie equivalent carbon cost in both developed and developing nations.
8.7.4 Equivalence in the reduction trajectory
for the traded sector.
8.7.5 A critical mass of production from
the activities listed in Annex I of the current EU ETS directive.
8.7.6 The type of system to be implemented
(absolute/relative targets).
8.8 BCA believes that provision should be
made in the Directive for the reduction trajectory for the traded
sector to be adjusted depending on the nature and rigor of any
international agreement.
8.9 The point at which an international
agreement is deemed to have been concluded has significant implications.
If concluded (ratified/adopted/comes into force) in 2013 at the
start of Phase III energy intensive industries will be required
to reduce emissions even further.
8.10 However, if the agreement is adopted
later in Phase III eg 2017, then energy intensive industries will
be required to make step-change reductions which are unachievable.
BCA does not believe that this gives industry sufficient time
to adjust given the time lags that exist to build new facilities,
gain planning permission and obtain environmental permits.
8.11 It takes around seven years to design,
build and commission a cement plant that will have an operating
life of over 35 years. Consequently, although the international
agreement is supposed to level the "playing field" it
could actually cause a short term shock in product markets which
accelerates the importation of product therefore increasing the
"carbon footprint" of the UK and resulting in an unintended
consequence of the EU ETS. As such the Commission should amend
their proposals to limit the additional reduction, and extend
the timeframe by which the extra reduction should be made.
9. SCOPE AND
OPERATION
10. The sectors and gases that the Commission
proposes to include and exclude. We would be particularly interested
in views on the inclusion of Land Use, Land Use Change and Forestry
(LULUCF) sectors, including agriculture.
10.1 Overall, the cement sector supports
a trading scheme with the proposed broader range of industries
contributing to the reduction of greenhouse gas emissions. The
agricultural sector has a key role to play in relation to climate
change. Firstly as a contributor of a significant quantity of
GHG emissions and by the provision of bio-fuel as alternatives
to fossil fuels currently ubiquitous in energy intensive industry.
Any inclusion of the sector in EU ETS should consider the potential
impact on the emerging biomass fuel market.
10.2 BCA is concerned that greenhouse gas
emissions from incinerators and landfill gas continue to be excluded
from the system. The cement industry plays a crucial role in the
waste management of the UK by recovering annually over one million
tonnes of waste material as fuel and raw materials. BCA's view
is that the exclusion of incinerator and landfill emissions will
give an inequitable commercial advantage to these waste treatment
routes, whilst missing an opportunity to increase waste recovery
and consequently reduce further fossil fuel usage in cement manufacture.
11. The practical application and enforceability
of the scheme.
11.1 The practicality of some aspects of
the European Commission proposals does not bear close scrutiny.
Current proposals do not allow for European "sector caps"
to be derived from the EU central cap. It makes practical sense
to have EU-wide sector caps that are distributed using EU wide
sector benchmark methods using a top-down approach.
11.2 However, in order to ensure that the
sector caps are set at the correct level a bottom up assessment
should be done using the benchmark method. Sector caps will avoid
the potential distortions that different sector allocation methodologies
may deliver if competing products are provided with allowances
from the same allowance pot but using a different method. Sector
caps will also improve certainty for investment decision makers
when deciding the desirability of investing in the EU cement industry.
11.3 The current definition of installations
which qualify as new entrants inhibits the potential to consolidate
production at the most efficient sites and places a barrier for
companies to take advantage of upgrading existing installations.
Often emission reductions are made by consolidating and improving
the larger installations and closing smaller or older inefficient
plants. This important issue needs to be addressed if the EU ETS
is to encourage investment in existing industrial installations.
11.4 The key strengths and weaknesses of
the proposal. You may wish to consider in particular:
11.5 the extent to which the scheme as currently
designed will encourage technological innovation;
11.6 Although the proposed use of auctioning
to distribute allowances may, at the macro level, align with economic
theory, in practice it represents the least efficient method of
encouraging technological innovation. Auctioning introduces a
high cost penalty rather than acting as an innovation driver and
it also removes funds from companies that could have been used
for capital investment. Industries that are energy and capital
intensive such as cement need resources to enable investment in
new innovation and energy efficient processes.
11.7 In contrast, the use of benchmarks
to distribute freely the sector cap can provide the differential
between technologies whereby the least efficient receive less
allowances and the most efficient technologies receive more allowances
relative to their process requirements. The benchmark approach
is more effective for delivering technological change in industries
where the "benchmark" or technological standard can
be transparent and thus set a level of aspiration. It also means
that companies already employing the best available techniques
do not incur unnecessary costs from auctioning.
11.8 Whether it will result in the appropriate
price signal being sent.
11.8.1 The price signal will be set by the
market price, which in turn is determined by scarcity of allowances
within the market ie the level of ambition of the overall EU cap,
which has been set. Energy is a key feature of all decision making
in the cement industry as it represents 35—40% of variable
costs. In addition to the increased cost of carbon dioxide, the
cement industry will also be required to pay the costs of the
carbon dioxide emitted by the power generators as well as the
extant climate change levy and the additional cost that will be
levied from the ambitious renewable targets.
11.9 Whether it will be efficient and/or
equitable.
11.9.1 BCA believes that the current proposals
are neither efficient nor equitable. The cement industry in the
UK and the EU must have the opportunity to compete equally with
suppliers in non-carbon constrained countries. It is essential
that an equalisation scheme is in place before the industry is
required to buy CO2 allowances at auction.
11.9.2 Without equalisation, emissions will
move off-shore taking domestic industry and jobs with them and
allowing non-carbon constrained economies to exploit this competitive
advantage. The import of cement or clinker, even from technologically
equivalent plant, imposes an additional burden as a result of
its transport.
11.9.3 Until a truly equitable global trading
scheme is established, free allocation is the only practical solution
to the leakage of production, carbon and jobs. Importantly, free
allocation does not reduce the incentive to reduce emissions as
it does not affect the price of CO2 because the carbon price is
predominantly determined by scarcity.
11.9.4 Within an overall EU cap, it is feasible
for different sectors to follow different trajectory of CO2 reductions,
based on their investment cycle and abatement potential. Additionally,
BCA would expect a review of the EU trajectory before the rate
of reduction is decided for Phase IV of the EU ETS.
12. The potential application of the new
Article 24a permitting allowances to be issued in respect of projects
outside the scope of the Community scheme that reduce greenhouse
gas emissions.
12.1 BCA believes that emissions reductions
should be made at the point of lowest cost. Consequently, the
use of project credits, either within or outside of the Community
should be unlimited, as this will help promote climate change
mitigation and also allow those activities within the EU scheme
that have long investment cycles time to adjust.
12.2 In this regard Article 24a might be
strengthened by requiring the Commission to adopt implementing
measures for issuing allowances in respect of projects, which
may involve companies and Member States that reduce greenhouse
gas emissions outside of the Community scheme. The cement industry
could provide assistance with the use of waste-derived alternative
fuels that when used in the cement industry prevent emissions
being released outside the remit of the Community scheme in landfill
and incineration activities.
13. ALLOCATION
AND AUCTIONING
14. Whether decisions about the proportion
of permits to be allocated for free rather than auctioned should
be taken at the EU level or at the Member State level, and what
the time-frame for such decisions should be.
14.1 BCA believes that there should be a
maximum harmonised level of auctioning to ensure an equitable
European market. UK industry is particularly under threat from
imported product from non-carbon constrained economies due to
the large number of ports, easy access by sea and proximity of
major conurbations to maritime distribution centres. Although
auctioning should not apply to the cement sector as a sector vulnerable
to "leakage".
14.2 The illustration in Annex I identifies
the key cement import terminals. Consequently, key factors such
as this should be taken into consideration in freely distributing
the UK portion of the EU cap to strategic industries such as cement.
If the cement industry were subject to auctioning, a substantial
burden of additional costs would be imposed when the domestic
construction market which is facing difficult times.
14.3 The level of auctioning should be based
on the ability to pass through to customers the auction cost,
and this level will be different for different sectors and in
some circumstances for different Member States. As such, BCA believes
that a sectoral level of auctioning should be set where the level
takes into consideration inter alia:
14.3.1.1 ability to pass through auction
cost;
14.3.1.2 vulnerability to imports; and
14.3.1.3 carbon dioxide emissions relative
to product profitability.
14.4 Which sectors (if any) should continue
to receive a proportion of their emissions permits allocated free
of charge, and for how long.
14.5 If auctioning were applied to the cement
industry at the 20% rate in 2013, increasing to 100% by 2020,
the cost to the UK industry would be in the region of €1.9
billion over Phase III. To this cost would be added a further
electricity cost of €0.5 billion, (based on the pass through
of the carbon cost). See Annex II.
14.6 The UK cement industry has very limited
capability to pass through these additional costs to customers
and it is likely that the quantity of imported cement from non-EU
countries would increase. The construction industry would quickly
become dependent on externally sourced cement and security of
supply would become an issue.
14.7 BCA believes that the UK cement sector
is subject to "carbon leakage" and to prevent this it
would be necessary to receive free allocations until sufficient
market equalisation takes place, either by a robust future international
agreement or by a border adjustment.
14.8 There is currently uncertainty on the
detail of the "carbon equalisation scheme" proposed
by the Commission and how it will apply to different sectors.
This uncertainty is constraining investment decisions. One of
the BCA member companies has placed on hold €1 billion (of
which £200 million in the UK) of investment in the EU due
to EU ETS uncertainty[4]
Strategic businesses need to know as soon as possible that they
are likely to be recognized as competitively vulnerable to imports
so that investment can resume creating a healthy domestic cement
industry.
14.9 In the interim, until an equalization
scheme is developed, CO2 allocation should be based on free allocation
using performance based methods such as "benchmarking".
This is an important issue if encourage investment in existing
industrial installations is to be encouraged and carbon leakage
avoided.
14.10 BCA believes that the assessment (Article
10a[9]) on competitively impacted sectors should be made much
sooner than the proposed date of June 2011. Once sufficiently
robust criteria have been agreed, it should be possible to commence
such an assessment.
14.11 Even if a consensus were to be achieved
in at COP 15 in Copenhagen in December 2009, it could be well
into Phase III before any real "equalisation" can be
assessed in the trade of commodity products following implementation
of the international agreement in signatory states. As such the
carbon leakage assessment should begin in advance of COP 15. It
is essential that the Commission consults with industrial experts
during the "leakage assessment".
14.12 Whether the redistributive element
of the Commission's proposal (whereby poorer Member States are
allocated more auctionable emissions permits, thereby increasing
the revenues accruing to their Treasuries) is appropriate.
14.13 The EU ETS is an environmentally-targeted
instrument and it is therefore appropriate to use the revenue
from auctioning emissions permits wholly (minus the scheme administrative
costs) for the purpose of mitigation and adaptation to climate
change within the European Union. As such all of the Member State
auction revenue should be used entirely by that Member State for
the purpose of tackling climate change.
15. THE INTERNATIONAL
DIMENSION
15.1 The extent to which EU operators should
be allowed to meet obligations under the ETS by investing in projects
to reduce emissions outside the EU through the Clean Development
Mechanism (CDM).
15.2 As noted above in section 12.1, BCA
believes that emission reductions should be made at the point
of lowest cost. The use of project credits, either within or outside
of the Community should be unlimited as this will help promote
climate change mitigation and also allow those activities within
the EU scheme that have long investment cycles time to adjust.
15.3 The likely feasibility of creating
links between the ETS and other similar schemes around the world.
15.4 BCA is not in a position to give an
informed assessment of the likely feasibility of creating such
links, but notes that until the EU system is linked to equivalent
scheme of major global emitters: USA, China, India and Brazil
the effectiveness of trading for the reduction of emissions will
be severely restricted.
15.5 BCA believes that links with other
regional or national scheme require the demonstration of "equivalence".
The Commission proposals do not go far enough since they do not
include conditions for testing equivalence of the future international
agreement.
15.6 A more rigorous test for equivalence
might be based on:
15.6.1 Overall absolute emissions reduction;
15.6.2 Type of system (absolute cap and trade
not relative efficiency);
15.6.3 Scope: direct emissions rather than
indirect;
15.6.4 Effort sharing/Reduction commitment
of the traded sector;
15.6.5 Equivalent cost for the traded sector
ie equivalent carbon price;
15.6.6 Equivalence in the reduction trajectory
for the traded sector;
15.6.7 Equivalent monitoring, reporting and
verification (units, carbon factors etc);
15.6.8 Enforcement and penalties;
15.6.9 Functionality concerning banking,
borrowing and treatment of new entrants.
12 June 2008
Annex I
Not to scale.
Annex II
2 "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
3
Article 28 terminology. Back
4
Lafarge press release 14 February 2008, Paris. Back
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