Memorandum by BUSINESSEUROPE
EXECUTIVE SUMMARY
BUSINESSEUROPE supports the Commission's broader
objectives for the revision of the EU Emissions Trading Scheme
(ETS) Directive.
Business in is favour of an improved emission
trading scheme which, operated under the right conditions, will
provide the most cost-effective instrument to reduce greenhouse
gas emissions and to realise emission reduction commitments. At
the same time, it is crucial for the viability of the system that
it takes into account that business is operating in an increasingly
globalised economic environment and that only companies with a
good competitive position are able to invest in low-carbon options.
Therefore BUSINESSEUROPE urges the following improvements to the
directive:
— Prevent negative direct and indirect
effects of the ETS on the competitiveness of the manufacturing
sector in the absence of an international agreement with equivalent
burdens for industry outside Europe.
— Continue to carry out free allocation
to sectors exposed to international competition even after 2020
in the absence of such an international agreement.
— Target auctioning revenue to promote
the competitiveness of EU business and EU business activities
in the area of climate change.
— Agree on the rules and modalities
for auctions so that they can start in time and enable companies
to purchase allowances to guarantee on-going operations.
— Undertake a full impact analysis
of any future international agreement before EU targets are changed.
— Carry out analyses to evaluate the
burdens on the ETS and non-ETS sectors to ensure that cost-efficient
reductions are identified and undertaken.
— Widen JI/CDM credit limits to improve
the cost-efficiency of the ETS and promote the use of these mechanisms
to promote sustainable development.
— Make the new entrant reserve allow
effective operation/nationalisation of production.
— Predictability is essential: determine
elements critical to EU business within the legislation rather
than leaving it to the comitology procedure.
BUSINESSEUROPE has examined the Commission proposal
for the revision of the EU emission trading directive. It supports
the Commission's broader objectives for this revision. The proposal
includes a number of positive elements, whilst a number of other
elements give cause for great concern and require significant
amendment. These include:
1. POSITIVE ELEMENTS
(a) Increased harmonisation:
— in the single EU-wide cap;
— in the sector and combustion plant
definitions; and
— in the allocation of allowances to
new entrants (single EU new entrant reserve).
(b) Improved predictability and confirmation
of banking, ie the possibility of transferring unused allowances
from one trading period to the next.
(c) The "limited" step made towards
opt-out for small installations with emissions of less than 10,000
tonnes a year is welcome. Nevertheless, the threshold should be
raised to a minimum for emissions for all covered installations
of at least 25,000 tonnes. Small installations emitting less than
25,000 tonnes per year only account for 3% of total ETS emissions.
Exempted installations should be subject to alternative measures
which will deliver comparable carbon savings.
(d) On allocation provisions, we welcome
that the allocation method for emission allowances will take into
account the efficiency of different installations and modes of
production through the further development and use of benchmarking.
2. ELEMENTS REQUIRING
IMPROVEMENT
2.1 Prevent negative effects of allocating
allowances via auctioning to the manufacturing sector in the absence
of an international agreement
(a) Analytical background
Auctioning within the EU of allowances for the
manufacturing sector would have two types of very negative consequences:
— negative economic and social
consequences as European manufacturing industry faces international
competition and will be burdened by additional costs linked to
auctioning. These costs would come as an addition to the considerable
burden imposed on energy-intensive, and particularly electro-intensive,
industries through the impact on the electricity price of the
EU ETS; and
— negative environmental consequences
as relocation of some production outside the EU will result in
higher greenhouse gas emissions, notably when this takes place
in less environmentally efficient facilities (a development which
the Commission defines as "carbon leakage").
(b) Evaluation of the Commission's proposal
The Commission's proposal is designed to mitigate
the negative environmental impacts linked to auctioning in the
absence of an international agreement but fails to comprehensively
address the negative economic consequences that would arise should
an international agreement not create a level playing field amongst
companies in competing nations.[17]
Furthermore, an unacceptably complex burden of proof (involving
non-manageable tasks in terms of data collection and economic
forecasting) is put on business to demonstrate, years in advance,
that carbon leakage and economic consequences will result from
auctioning.
In addition, the fact that the Commission could
wait until as late as June 2010 before it determines which sectors
are exposed to carbon leakage would create a long time of uncertainty
with very negative effects on business strategies and investment
planning and thereby on growth and employment in these sectors.
(c) The way forward
Against the above background BUSINESSEUROPE:
— considers that the Commission's current
approach based on carbon-leakage-linked criteria is not appropriate
for preventing the negative economic impacts of EU auctioning
of ETS allowances in the absence of an international agreement;
— insists that the decisions regarding
the granting of free allowances must be taken in the new ETS directive
itself, within the regulatory process, and must not be left to
a future comitology process. The process of granting allowances
must be based on a pragmatic, evidence-based approach assessing
the exposure of sectors to international competition;
— asks that high priority is given
to the definition of robust criteria for assessing whether a future
international agreement will ensure burden-sharing with equivalent
efforts; and
— insists that manufacturing industries
exposed to international competition must receive 100% free allocations
against independently scrutinized technology or efficiency benchmarks
unless and until there is an international agreement with equivalent
burdens for industry outside Europe. It should be noted that the
granting of 100% free allocations does not mean that companies
concerned will avoid the costs of the ETS, because in order to
meet the emissions reduction cap imposed by the ETS they will
still have to invest in carbon abatement technologies and buy
allowances on the market. Industry covered by the ETS has to reduce
emissions by 21% by 2020 compared with 2005, no matter the allocation
method.
Auctioning is appropriate for sectors that can
pass through costs (such as electricity). However, it is nevertheless
imperative to identify and address the effects that this pass-through
has on installations exposed to international competition. Auctioning
should be introduced in a stepwise manner in the electricity sector
to avoid dislocations in the power market.
2.2 Full auctioning for all "covered"
sectors starting in 2020
The move to full auctioning for all sectors
as envisaged in Article 10a gives little or no clarity about the
equivalent measures from our international partners that would
justify such a move nor on the timing by which these measures
should effectively be in place. BUSINESSEUROPE urges that free
allocation to those sectors exposed to international competition
are continued until measures which result in an equivalent burden
are effectively implemented and enforced in other major emitting
countries.
2.3 Auctioning revenue should be targeted
to promote the competitiveness of EU business and EU business
activities in the area of climate change
Business is the source of the "income"
from auctioning and, therefore, it is appropriate that this revenue
is used to improve the competitiveness of EU business and to promote
EU business activities in the form of increased R&D in climate-related
technologies, technical improvements, renewables, energy conservation
and efficiency measures.
2.4 Auctioning certainty
Where auctioning will take place, for example
in the power sector, the modalities and quanta for auctioning
must be established, in consultation with affected parties, by
the end of 2010 at the latest. Auctions must start to be held
in 2011. Moreover, it is of utmost importance to organise auctions
in such a way that financial speculation is avoided.
2.5 Automatic change in targets in the event
of an international government
The European business community fully supports
the need to reach an international climate change agreement. The
EU's commitment to increase emission reduction efforts in the
event of an international agreement is an important signal to
other jurisdictions. However, any ratified international agreement
must create comparable and enforceable carbon restraints before
passing burdens such as higher GHG targets onto business. Therefore
criteria are needed against which an international climate agreement
can be evaluated. For BUSINESSEUROPE, any revision of the EU commitments
should involve a full re-evaluation of the impacts on individual
sectors as well as the "non-covered" sector to ensure
that cost-effective emissions reductions are achieved.
2.6 Burden on the ETS sector
In the proposal, there is the considerable discrepancy
between the reduction target required of "covered" sector
and that of other sectors. The minus 21% target for industry based
on a base year of 2005 means in reality that the covered sector
will have been required to already reduce emissions by more than
30% if related to the 1990 base year. The tasks of reducing emissions
must be spread across all sectors in an equitable manner through
thorough and transparent analyses taking into account actions
already undertaken as well as cost-efficiency.
It is essential that the right signals are given
to Member States to reduce emissions within all sectors, particularly
households, where cost-effective investments can be found. Furthermore,
reductions in the non-ETS sectors must not lead to distortions
in competition across the EU between companies.
2.7 Increasing JI/CDM credit limits will improve
cost-efficiency of the ETS
Limits on the use of JI/CDM credits are appropriate
in order to maintain the principle of "common but differentiated
responsibility". However, the directive's proposed limits
are too severe. Widening the limits will increase the efficiency
of the EU ETS, reduce the carbon migration risk, provide a better
signal to carbon market project developers and increase the contribution
of the EU ETS to global sustainable development and the establishment
of an international agreement on climate change.
The veto on certain types of projects by Member
States must not allow the EU to redefine the "quality"
of products that have been approved under the procedures contained
within any international regime. Regulations on the acceptance
of credits from projects must be consistent with those agreed
under international agreements.
2.8 New entrant reserve should enable effective
operation/rationalisation of production
The definition of "new entrant" should
be adjusted to allow companies, where possible, to concentrate
their production on their most efficient sites within the EU.
To this end, it is key to ensure a fair and consistent treatment
of the three possible industrial scenarios: running existing installations,
increasing capacity of existing installations and developing new
installations. BUSINESSEUROPE considers the proposed size of the
"new entrant" reserve (5% of the overall cap) to be
too large. The reserve should be of a size commensurate with growth
in those sectors that are able to draw from the reserve.
2.9 Governance
There is concern that comitology is used for
the development of many of the measures within the proposal. The
comitology process lacks the transparency and effective stakeholder
consultation, which is necessary to decide on essential aspects
of the directive, such as allocation methodologies. In particular,
BUSINESSEUROPE insists that the decisions regarding the granting
of free allowances must be taken in the new ETS directive itself,
within the regulatory process.
26 May 2008
17 The Commission's focus on negative environmental
impacts (and not an overall negative economic impacts) is reflected
in recital (19) page 16 and in article 10a points 8 and 9 of document
COM 2008-16. It should also be noted that the criteria the Commission
uses to asses the existence of additional emissions due to carbon
leakage are fairly basic. For example, the Commission only takes
account of the environmental efficiency of manufacturing installations
in non-EU countries. It takes no account of the carbon intensity
of the electricity consumed by these installations, or of the
higher CO2 emissions that could be generated by extra transport
occasioned by the shift of production. Back
| 
