EU emissions trading: the case for free allocation

1. EU emissions trading: the case for free allocation Ian Rodgers Director, UK Steel The manufacturers’organisation

2. The case for free allocation • Why free allocation is essential for steel. • The environmental implications • Allocations must relate to abatement potential. • Not forgetting “indirect” emissions.

3. Carbon pricing is costly • Steelmaking is energy-intensive. • Integrated process route emits 1.8 tonnes of CO2 per tonne of steel. • Today, carbon pricing would increase steelmaking costs by c. 10%. • Phase 3 could be much higher. • The electric arc process route is electricity intensive = indirect emissions: • Expansion limited by finite availability of scrap

4. International competition is fierce • Steel is a highly sophisticated commodity product. • One third of the world’s steel is traded across international borders. • Strong output growth in low cost economies e.g. Brazil, Russia, India, China, Ukraine • Most of them not carbon-constrained • EU imports surged by 105% from 2005 to 2007.

5. And it’s “official”

6. Incurring carbon costs = carbon leakage • Carbon costs can not be passed on to our customers. • As competitiveness is progressively eroded, market share will be lost. • The only survival strategy will be for companies to invest in overseas steelmaking facilities. • The total volume of steel produced worldwide will not change – only its location. • The same applies to the industry’s emissions.

7. Free allocation is the economic solution • 100% auctioning is economically rational where all competitors are subject to the same regime. • Otherwise auctioning distorts competition. • For traded sectors, free allocation is the only way of stopping carbon leakage. • And it must be 100% free allocation: • Every tonne of CO2 for which the steel industry is forced to buy an allowance is at risk of being “leaked”.

8. What about border measures? • Difficult to make WTO compliant. • Means there’s a risk of provoking trade wars. • Not against in principle. • But a low-cost allocation solution is preferable.

9. Free allocation is the environmental solution • Our preference is for allocations based on EU-wide sectoral benchmarks. • These will provide incentives for the less-efficient to become more carbon-efficient; • At the same time as minimising the risk of carbon leakage.

10. Over-tight caps must not be used as a surrogate for auctioning • Competitiveness is impacted by the need to buy allowances, regardless of whether this is caused by: • auctioning; or • too small a cap. • Caps must reflect sectors’ abatement potential.

11. oil injection and burden preparation hot blast temperature >1200 °C oxygen enrichment 800 top pressure theoretical minimum level of carbon demand burden distribution improved sinter quality 600 coal injection 414 kg /t hot metal oil coal Reduction agent consumption (kg/t hot metal) 400 coke 200 0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 The steel industry has limited abatement potential with today’s technology Source: Thyssen-Krupp

12. Electricity-intensive sectors also suffer competitiveness impacts • Electricity generators already pass through opportunity costs of carbon. • Auctioning will end wind-fall profits, but generators will still pass on incurred costs. • As caps become tighter, the cost impact on electricity-intensive sectors will become more severe. • Answer: give such sectors allowances relating to their electricity purchases.

13. Free allocation: the pro-environment solution for sectors exposed to international competition. The manufacturers’organisation