CO 2 -Regulierung und Wettbewerbsfähigkeit der energieintensiven Industrien post 2020

1. Düsseldorf 6.11.2014 Karsten Neuhoff, Bruno Vanderborght, Ian Christmas, Arjan van Rooij, Misato Sato, Oliver Sartor , Manuel Haussner, Andrzej Ancygier, Anne Schopp, William Acworth Phlilippe Quirion, Ayse Tugba Atasoy, Benedikt Mack, Nagore Sabio, Jean-Pierre Ponssard ++++++ Project team CO2-Regulierung und Wettbewerbsfähigkeit der energieintensiven Industrien post 2020

2. Scope of the project Independent, objective research on the evidence of state of industry and past and current effectiveness of the EU ETS and other instruments for Energy Intensive Industries; Combine data analysis, interviews with senior industry managers and CEOs and workshops; Assess policy development necessary to advance portfolio of mitigation opportunities outlined in low-carbon roadmaps whilst maintaining a sustainable industry. The study focused on the cement and steel sector. 0 2

3. Present state of the European steel industry • Low-carbon opportunities for the steel sector • Policies to unlock low-carbon opportunities?

4. Present state of the European steel industry In 2013 steel use in the EU still 25% below the pre-crisis levels; Steel demand unlikely to return to 2007 tonnage levels; Profit margins on average below level to justify re-investment; 1

5. Present state of the European steel industry 1 Data: World Steel Association, 2013, Global Steel Statistics; Eurostat Structural Business Statistics

6. Present state of the steel industry 1 Data: Orbis

7. Low-carbon opportunities for the steel sector – overview 2 Illustration Fuel related emissions Process related emissions 168 Mio. t 1. Energy Efficiency ofproduction EAF 5.Higher recycling rates Low-C Electricity Scrap (recycling) DRI /EAF EU Steel Production BF / BOF 2. Break through technologies (e.g. CCS) Iron ore 3. Higher quality / lower weight steel 4. Substitution/efficient steel use Emissions/ t steel 1,88 tCO2/t Steel

8. 1- Energy efficiency 10-15% Emission reduction potential in Western Europe; Investment limited by Short pay back requirement (typically 2-4 years, now shorter) Low profits and growth prospects of industry Financial capacity of industry limited 2

9. 2 - Breakthrough technologies pursued with ULCOS 2 Expectation of climate policy initiated ULCOS project Why have ULCOS projects stalled? CCS-based technologies only viable with permanent carbon pricing regime Steel firms not prepared to finance and take whole risk (EC was not prepared to take risk share under NER 300 facility) (Political challenges of CCS in Europe) Top Gas Recovery: pilot plant proven, but €300 mio. demonstration plan cancelled for lack of suitable funding HISARNA pilot plant working at Ijmuiden but funding in doubt for scale-up Electrolysis: laboratory scale only, requires C free electricity, very long shot CO2 free (power) 20-30% CO2 savings with CCS 60-75%

10. 3 – Higher value steel products to deliver service with less weight 2 Automotive 30-40% savings in body weight over the last 10 years Innovative high strength steel& forming techniques (tailored blanks, hydroforming) With competitive pressure from alternative materials Facilitated by value chain integration & regulatory requirements UltraLightSteel Auto Body - private sector initiative 1990th To meet fuel efficiency standards lighter components required R&D expenditures maintained through crisis period

11. 4 – More efficient use of steel in finished products Examplebuildings: Many products made of steel could be 25-30% lighter (technically) Steel use in buildings can be saved, for example, by using tailored shapes, supporting multiple loads with fewer structures, aligning loads to avoid bending, avoiding over-specification of loads etc. But several barriers inhibit change: Excess use of steel can be cheaper than using less (e.g. risk of component failure, higher cost during design, quality control) Fragmented value chain Existing standards and regulation (e.g. minimum requirements instead of target requirements) (Allwood et al 2012) 2

12. 5 – Recycling of scrap Recycled steel has emissions up to 75% below primary steel Availability increases with maturity of economy, EU scrap=64% demand EU exports around 20% of its scrap because Typically BOF furnaces only use 25% scrap EAF can use 100% scrap, but share small outside Spain and Italy Global CO2 emissions not influenced – only regional increase –> noneedtoconstrainscrap-trade Recovery rates vary across products Cars (almost 100%), steel packaging (74 %), buildings (lower) –> unlock improvement potential Declining quality of scrap due to increasingly complexity of products –> explore options to improve separation during design & recovery. 2

13. Policy framework for different low-carbon opportunities 3

14. EU ETS Sufficient carbon price level necessary Early EU ETS triggered review of mitigation options / ULCOS -> Higher carbon price necessary to guide low-carbon choices Robust leakageprotectionrequiredforcrediblecarbonprice Uncertainty about level of future free allocation and activity level requirements Carbon price needs to be reflected in steel price for consumers To create incentives for tailored steel/efficient steel use To create commercial perspective for break through technologies 3a

15. Option 1: Shift to output based allocation (dynamic alloc) Simple allocationprincipleforcorporatedecisions Avoidslarge surplusallocation / distortionsbetweencompanies Easiertoimplementthanotheroptionsstartingfromexistingsystem Challenge Undermines carbon price signal for tailored steel & efficient use Uncertainty about level of future leakage protection Either cross-sectoralreduction factor adjusts allocation to cap Or, some sectors must „cross subsidize“ other sectors (e.g. extra allowances taken from auctioning pot) Limited credibility of regime of continued funding from other sectors/public budget for role out of break through technologies 3a

16. Options 2-4: Reflecting carbon price in product price Threeoptionsthatcanbeusedwithoutcommon global carbonprice: 1 Borderlevelling Non borderlevelling: 2. Consumptiontax on embodiedsteel in product 3. Output basedallocation & inclusionofconsumption in ETS Common Features: Competing commodities need to be included (cement, …) Requiresclearstrategyforuseofrevenueforclimateaction 3a

17. Option 2: Border levelling Applyingbestavailabletechnologybenchmarktoimports&exports: Allows for full auctioning and provides full leakage protection Incentives and revenue for low carbon options Challenge Concern about international repercussions; Question how far in value chain to apply adjustment: 3a Primary steelproduction Intermediaryproduct Recycledsteel Borderlevellingforsteelcontent Radio Body, Engine Washingmachinebody Washingmachinecontrolls Beems Car Washing machine

18. Option 3: Consumption tax on embodied steel in products Tax on all steelboughtbyEuropenconsumers (irrespectiveoforigin) Option A Taxbased on trackedcarbonemissions (with fall back rate) Createsfullincentivesacrossvaluechain Option B Tax proportional tosteelvolumetimesbenchmark rate Createsincentivesfortailoredsteelandefficientsteeluse Challenge Politics ofimplementing a tax at European level Option A: Tracking emissionsspecifictoproduct&confidentiality? Option B: Incentives forefficiency/break-throughtech. in production? 3a

19. Option 4: Combine output based allocation with inclusion of consumption in ETS Developfourthoptionforleakageexposedsectors in ETS Directive Incentives for efficient production from output based benchmark alloc. Combined with downstreamcharge on all steelconsumed in Europe Implementation: Steel producedorimportedisrecorded & transfertraced (tonsofsteel) Charge toclimateactiontrustfundwhensteelmovedtoconsumption (steelweight* benchmark * quarteraveraged ETS price) Evaluation: Faciltatesallocation at fullbenchmarkasvaluerecuperateddownstream Administration: Learn from existing systems (alc., tobac.) Threshold for products covered when imported (as with BTA)? Efficient carbon price, not trade related - no WTO concern 3a

20. Ensure engagement of all stakeholders Engage consumers to facilitate innovation / diffusion of new products: Labels for carbon footprints to trigger customers’ consciousness Use standards, specifications, and regulations to require final products / buildings with less embedded carbon Ensurelife-cycleanalysisreflects all productphases Maximize the collection and recycling of end of life steel scrap Create platform for cooperation between steel and construction sector 3b

21. Catalyze innovation / strategic investment For processes: RD&D programme on long term breakthrough technologies (NER300, EIB, Risk Sharing Finance Facility, H2020): Address high cost structure Addressscale of investment and impliedslowinnovationspeed Coordinate with investment cycle of refurbishments Ensure risk allocation that facilitates participation For bulk products: Enhancing value added / specialisation promising strategy for steel industry: Innovation policy for new products, e.g. with public procurement 3c

22. A vision for the steel sector and it‘s customers Low-carbonroadmapcouldbecome a startingpointforindustryvision Developjointstrategytounlockportfolioofmitigationoptions Translateroadmapintotangibleinvestmentandinnovationframework Long-term credibleleakageprotection, carbonprice & carbonprice pass through Flexibiltyunder ETS capavoidscontroversyaboutsectortarget Explorecomplementaryregualtory / engagementpolicies Providepublicfundingandsupportforinnovation Innovation & engagingcustomersstrengthenspositionof EU steel 4