Study weakens case for free EUAs to European industry

Published 11:07 on November 25, 2015  /  Last updated at 19:23 on November 25, 2015  /  EMEA, EU ETS  /  No Comments

Big-emitting industries pass on some of the cost of being regulated under the EU ETS, according to long-awaited research tasked by the European Commission that environmentalists say weakens the case for future free EUA allocations.

Big-emitting industries pass on some of the cost of being regulated under the EU ETS, according to long-awaited research tasked by the European Commission that environmentalists say weakens the case for future free EUA allocations.

Research by consultancies CE Delft and Oeko-Institut, quietly published on the Commission’s website late Friday, found that the product prices among many ETS-regulated industries were significantly influenced by the cost of carbon over 2005-2014.

Some of the most extreme examples showed as much as 100% of the cost was passed through by Portland-type cement makers in the Czech Republic and Poland, and 75-100% by flat steel producers Europe-wide.

The research raises questions surrounding the EU’s proposal to provide extensive free allocation of EUAs to industries after 2020, according to Sam van den Plas of environmental campaigners WWF.

“These pass-through rates are unaccounted for in the [proposal’s] carbon leakage risk assessment. This needs to be corrected in co-decision,” he said.

He was referring to the Commission’s July proposal to continue allocating free allowances to the vast majority of industry through 2030, which lawmakers in EU member states and the bloc’s parliament are now scrutinising in a co-decision process that could substantially change the bill over the next year.

Since 2013, the EU ETS has forced most power companies to pay for all the carbon allowances they need to comply, but industries are still given the vast majority of the units they need for free because they are deemed vulnerable to carbon leakage and need to be shielded from carbon costs not faced by rival firms in countries without comparable regulations.

If they are deemed to have passed on some of the carbon costs in their product prices, this undermines the case for them to be shielded via free allocations as they would potentially be earning billions of euros in windfall profits.

“Our econometric results show that significant cost pass-through could be observed for a number of products, in particular in the cement, iron and steel, and refineries sectors, with the actual rates of pass-through diverging,” the study said.

It covered six ETS-regulated sectors: iron and steel, refineries, cement, organic basic chemicals, fertilisers and glass.

The study did not assess whether market share had been lost as a result of the cost pass-through, which would be the ultimate indicator of carbon leakage risk. But it noted that other studies had not documented a risk of carbon leakage for EU industries.

It also added that the findings did not contradict most industrial companies’ claims that they do not pass through carbon costs, because product prices tend to be set by the marginal producer and followed implicitly by everyone else.

By Ben Garside – ben@carbon-pulse.com

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