The European Parliament’s cross-party environment committee (ENVI) is proposing post-2020 reforms to the EU ETS that would largely maintain free allocation for many industry sectors. But via one amendment, ENVI would no longer give a free allocation to EU cement, lime, brick and tile producers, while establishing a border carbon adjustment measure requiring European importers of these products to buy EU carbon allowances. Former cement industry executive Bruno Vanderborght questions why EU cement association Cembureau opposes such a move when it once promoted the idea.
When I first saw the amendment, I thought it came from the cement industry. Why? Because the cement industry has proposed and advocated for the inclusion of importers in the EU ETS since 2007.
In 2007, cement producer Holcim and Cembureau introduced the concept of inclusion of importers in the scope of the EU ETS to the European Commission. Several further discussions followed and the French cement companies successfully lobbied the French government to promote border adjustment measures (BAM). As a consequence, Article 10(b) 1(b) of the 2009 ETS Directive includes an option to include importers in the EU ETS.
Several internal studies on inclusion of the importers were undertaken, including three meetings with lawyers from the WTO, coming to the conclusion that under certain design criteria a BAM with inclusion of the importers in the ETS can be perfectly compatible with WTO rules. Hence, Cembureau commissioned in 2009 a study from the Boston Consulting Group, which concluded that the “inclusion of the importers is possible, beneficial for the environment and decreases the risk of carbon leakage”. However, this study assumed the EU producers would continue to receive a free allocation of allowances.
After a lot of internal discussion, in 2011 Cembureau commissioned another BCG study that included a scenario with inclusion of importers and full auctioning. It concluded: “continued full free allocation maximizes the gross margin for the clinker industry but beyond 2020 inclusion of importers and full auctioning can – under certain conditions – be beneficial for the cement industry.”
All these studies and discussions lead the CEO of Cembureau in April 2012 to submit “Five Key principles of a future ETS policy for the cement industry” for approval by its board.
- The 2nd principle states: “continuation of extended free allowances … is a workable mechanism … However, maintaining volume of free allocated allowances can lead to perverse effects such as non-closure of inefficient installations as well as overproduction”.
- The 4th principle states: “In the case of a new Directive … (continuing the present free allocation approach between 2020 and 2024), full auctioning and inclusion of importers could, at one point in time, turn out to be a preferable scenario for EU cement industry. Should allocated free allowances decrease severely in 2021 … full auctioning and inclusion of importers would be preferred from 2021 on.”
Still today, the Cembureau website states (Eurobrief, June 2013): “it is essential for the Commission to establish a long-lasting solution ensuring a level playing field between domestic production and importers. Free allowance allocation is a transitionary measure to avoid leakage and a level playing can be achieved most effectively by equalising measures such as a Border Adjustment Mechanism (BAM) or free allocation.”
So why does it not support border measures now?
As the first BCG study concluded: “continued full free allocation maximises the gross margin for the clinker industry”.
Ten years experience with the ETS has amply proven that free allocation does not reduce cement industry’s CO2 emissions and is not even an effective measure against leakage. The cement industry has gained hundreds of millions of euros in windfall profits from free allocation, sufficient cash to replace most, if not all, obsolete inefficient installations. Nevertheless, not one has been realised.
According to the Cement Sustainability Initiative database, the EU has the highest share of clinker production in old, energy-intensive installations worldwide, behind only to the former Soviet Union and the US.
None of the proceeds have been used to lower CO2 emissions. Quite the contrary, the cement industry used those inefficient installations to increase export of clinker – subsidised by excess free allowances – to Africa, a region with more modern installations. This is leakage, negative leakage.
Practice shows that despite economic theory, full free allocation completely erodes the incentive, and the necessity to lower CO2 emissions. Full free allocation is the easiest way for the cement industry as it maximises gross margin. Hence, this is the obvious first choice of the industry.
Only in the case of a severe shortage of free allowances does zero free allocation and the inclusion of importers become the preferred option. This policy would create a strong incentive for CO2 reduction throughout the complete value chain and will protect the competitiveness and profitability of the cement industry. However, no doubt it would trigger significant change in the industry and in the short-to-medium term, it would be more difficult and require innovation. There are some legitimate concerns from the cement industry. Those can all be adequately addressed through the Directive’s implementation measures. Due attention will have to be paid to these through the legal and technical aspects of the delegated act of the Commission by June 2019.
Just two weeks ago at the World Economic Forum, Eric Olsen, CEO of cement maker LafargeHolcim, said that his company can reduce CO2 emissions per tonne of cement by 40% by 2030, but that for doing so there needs to be regulation that creates a meaningful and increasing carbon price that can be passed though the whole product value chain and trade policy should be included in the ETS.
In other words, he said on-the-record that these internationally traded products should be subject to the same system. ENVI’s amendment delivers all this, which was why I thought it had been proposed by the cement industry, or if not then the cement industry would firmly endorse the amendment.
By Bruno Vanderborght, consultant, Lesscoo (Bruno retired at the end of 2012 as senior vice president of climate strategy at cement-maker Holcim, which became LafargeHolcim following a 2015 merger). This article was adapted from an intervention Vanderborght made today at an event in the European Parliament hosted by environmental campaigners Sandbag, InfluenceMap, and Carbon Market Watch.