Industrial companies will not see their free EUA allocations slashed under the Cross-Sectoral Correction Factor (CSCF) next decade under proposed post-2020 reforms because regulators will allocate units more selectively, analysts ICIS Tschach Solutions said on Tuesday.
This could help secure approval for the bill by EU lawmakers as industry has been strongly opposed to the CSCF in the current trading phase, as it has led to even Europe’s cleanest plants not getting all of their EUAs for free.
The finding forms part of ICIS Tschach’s six-page white paper on the European Commission’s proposal to revise the EU ETS’ Phase 4 (2021-2030), draft rules that lawmakers can alter before the bill goes for final approval early next year.
“The proposal would result in the CSCF not being triggered during Phase 4. This was a critical element that the Commission´s wanted to achieve through its new proposal, and this is achieved mainly through revised approaches for the benchmark and historical activity levels,” said ICIS Tschach analyst Philipp Ruf in a press release.
In 2013, the Commission was forced to apply the so-called CSCF, slashing all free allocations by 6% because the requirements of those on the list exceeded the entire amount of EUAs available. This uniform haircut of free allocations deepens each year to 2020 as the ETS cap decreases.
ICIS Tschach’s findings are in contrast to views when the bill was first published last July. Consultancy Ecofys had expected the CSCF’s 18% haircut in 2020 to deepen each year through Phase 4 to at least 30% by 2030. They and other analysts have since updated their projections to show the CSCF having much less of an impact.
Later on Tuesday, the Commission said it would host a webstreamed expert meeting some time in Q2 to assess the various assessments of the post-2020 application of the CSCF.
INDUSTRY-FRIENDLY, TWEAKS NEEDED
“The proposal is a step in the right direction for the improvement of the free allocation system but that some provisions have room for optimisation,” the ICIS Tschach analysts said.
Key findings and recommendations in their white paper:
- The 43% share of units for free allocation, as proposed in the Commission’s post-2020 reforms, is enough to cover the entire industrial sector’s needs.
- A provision to allow factories to get more free EUAs for production increases, rather than just capacity investments, “goes in the right direction” to not impeding industry growth, but only if lawmakers lower the proposed qualifying threshold of a 50% rise in output.
- The partially-tiered free allocation to carbon leakage-threatened industry could be divided further to better protect individual sectors at risk. (The EC has proposed tiering the allocation of free EUAs to industry to two levels, setting them according to the varying levels of carbon leakage risk)
- The proposed 1%/year reduction to the benchmarks determining each sector’s level of free allocation might be a struggle for some carbon-leakage exposed sectors to keep up with.
- Some southern European industrial firms might lose out from the proposed use of more up-to-date production data to determine free allocation levels, because these companies are still producing at very low levels following the 2008 economic crisis.
- Our quick guide to the key elements of the proposal.
- Our analysis on why industries expect to face escalating costs from it.
By Ben Garside – firstname.lastname@example.org