March 3 2017 brussels

March 3, 2017

After a disappointing vote in the European Parliament two weeks ago, EU Member States unexpectedly revived the prospect of a robust reform of the EU Emission Trading Scheme (ETS) that could yet give it a long-term future. A first glimpse of hope, WWF called it. Even the price of CO2 went up a bit.

On 28 February, EU Environment Ministers met in Brussels and finalised their position on the reform. The Parliament did the same thing on 15 February. This means that the two institutions can now sit down together – with the European Commission – to thrash out a final deal.

A rejuvenated EU ETS is in sight nearly two years after the Commission first issued sorely needed proposals for change. “Sorely needed” because the carbon price has languished at an insignificant €5 a tonne for years.

Scrapping the surplus

The most significant –and surprising – decision made by ministers on Tuesday was to cap the number of carbon allowances in a new “market stability reserve” (MSR) from 2024, to the number of allowances auctioned in the preceding year. This was an idea pushed by Sweden, Luxembourg, the Netherlands and France.

In practice, it means a potential cancellation of about three billion allowances by 2030, most of it in 2024, calculates UK-based NGO Sandbag. That’s nearly two years worth of EU ETS emissions. More importantly, it would “very likely eliminate all of the surplus” in the system, Boris Lagadinov, Head of Analysis at Sandbag, told Energy Post.

It is this surplus of allowances, accumulated due to events from the economic crisis to an influx of international credits to renewables and energy efficiency gains to over-generous allocations from the beginning, which has kept the price at just €5 a tonne.

The cancellation goes hand in hand with a decision – like that of the Parliament – to double the rate at which surplus allowances are funnelled from the market into the MSR (from 12% to 24%). Member states want this higher rate to apply for the first five years of the MSR’s operation, from 2019-2023; MEPs said four years.

Sandbag, which is the only group so far that has attempted to put numbers on all these proposals, estimates that the faster MSR out-take rate plus allowance cancellation will result, by 2030, in just 300 million allowances on the market and some 500-700 million allowances in the MSR.

That’s compared to about 1.7 billion (or one year’s worth of allowances) on the market today and an estimated 3.7 billion in the MSR in 2030 under a business-as-usual scenario.

Price effects

The carbon price jumped from about €5 to €6 a tonne on the back of the Environment Council’s news. This may not sound like much, but it’s the highest prices have been in two months and trading volumes tripled to their highest levels since June, Bloomberg reported.

Yet three weeks ago we quoted several experts saying that any cancellation of allowances in the MSR – the Parliament also proposed to cancel 800 million allowances in 2021 – would have no short-term impact on the carbon price.

They said that the carbon price is doomed to its €5 a tonne for another 5-10 years in the absence of a carbon price floor or alignment of the EU ETS cap with actual emissions in 2020.

The new proposal to scrap the system’s enormous surplus through the MSR does not alter the fundamental supply-demand balance on the market for the next trading period, Lagadinov explains. Nevertheless, he expects it to “filter through to higher prices” before 2030.

Big surprise

“The Council being more ambitious than the Parliament. These are truly strange times.” tweeted climate and industrial policy researcher Tomas Wyns at the Institute for European Studies in Brussels on Tuesday.

As we reported two weeks ago, what usually happens in Brussels is that the Commission issues a proposal that the Parliament tries to toughen up and the Council wants to water down.

This is why there was surprise – and optimism – from environmentalists on Tuesday. “A first glimpse of hope for the EU carbon market?” asked WWF. “EU Environment Ministers show a little courage”, said the Greens in the Parliament.

In contrast, industry reactions were remarkably thin on the ground – in stark contrast to two weeks ago after the Parliament’s vote.

One sector that did comment, Eurofer, representing the European steel industry, was unhappy. There is no special carbon leakage treatment for some industries like steel, in the Council text. The Confederation of European Paper Industries (CEPI) told Energy Post it welcomes this absence of “discrimination”.

Industry was less successful in lobbying for extra free allowances in Council than in Parliament. Member States decided to make just 2%, not 5%, more free allowances available if demand for them exceeds supply. Countries like Germany had pushed for more. But many governments fear a loss of revenue if they give away too many allowances for free.

There was no echo of the Parliament’s call for a European-level fund to compensate industries for carbon pass-through in electricity prices either. Member States did agree that they can use up to a quarter of their auctioning revenue to compensate industries for indirect costs at national level.

Gaps

Despite their optimism, NGOs emphasised that the proposed changes do not put the EU ETS on track to deliver on Europe’s Paris climate commitments. Ministers – like MEPs – chose not to raise the 2.2% rate at which the EU ETS emission cap will decline from 2021, as proposed by the Commission before COP21 in Paris.

Nor did they introduce tougher environmental criteria for a series of funds supported by the reform to specifically exclude new coal plants for example.

Sandbag said in a press release that even by making just 2% more allowances available for free “with the prospect of an increasing carbon price, the EU ETS risks continuing to serve as a scheme for industrial subsidy”.

Hanging by a thread

Crucially, the final deal, which took all day Tuesday to hammer out, was not endorsed by all countries. In fact, nine Member States voted against: Bulgaria, Croatia, Cyprus, Hungary, Italy, Latvia, Lithuania, Poland and Romania.

Poland’s minister felt “cheated”, Reuters reported. Bulgaria, Hungary and Romania considered any change at all to the MSR “premature”.

NGOs like Carbon Market Watch believe that additional measures, such as emission performance standards for industrial products like concrete, will be an essential complement to the EU ETS going forward. “Without complementary and national measures to reduce emissions in Europe, we will not meet our commitment under the Paris agreement,” said Senior Policy Officer Agnes Brandt.

All of Sandbag’s cancellation projections depend on modelling and many uncertainties remain, including how many allowances will be sold versus given away for free to industry, for example, but also how emissions will evolve going forward.

Last but not least, the entire cancellation idea could yet be buried. Right at the end of the Council text (p43), Member States introduce an enormous caveat: yes to cancellation “unless otherwise decided” in a first review of the MSR. This is to take place by 2021.

The EU carbon market is far from in the clear. But as Sandbag’s Lagadinov says of this week’s vote: “It gives the EU ETS a chance.”

March 3, 2017

The European paper industry shows that decarbonising its production processes is a hell of a job – but it can be done. They will need all the support they can get, though.

The European pulp and paper industry was the first industrial sector to issue a low-carbon 2050 roadmap in 2011. Other industries followed suit, including glass and ceramics in 2012, and cement and steel in 2013. The trigger for all these was the European Commission’s “roadmap for a low-carbon economy in 2050”, issued in March 2011.

In the wake of the Paris Climate Agreement, the Commission will revisit that roadmap in 2018. That is also when the Intergovernmental Panel on Climate Change (IPCC) is due to publish a report on the implications of trying to limit global warming to 1.5 degrees Celsius.

This week however, the Confederation of European Paper Industries (CEPI) set another precedent by becoming the EU’s first industrial sector to revisit its original 2050 roadmap. Let’s be clear: it has not tried to map out the effects of the Paris Climate Agreement – the implications of this still need to be “thoroughly assessed”.

But what CEPI has done is to explain in detail how and at what cost it believes it can deliver the 80% greenhouse gas emission reduction it set out back in 2011 (the Commission actually estimated that industries would need to cut their emissions by 83-87% by 2050 for an economy-wide reduction of 80%).

€44 billion required

CEPI calculates that emissions from Europe’s forest fibre and paper industry could be brought down to 12 million tonnes a year by mid-century with additional investments of €44 billion, or close to 40% more than current investment levels of some €3.5 billion a year.

Just over half of that (€24 billion) would have to be spent on decarbonising the paper sector’s existing assets through energy efficiency, fuel switching, demand-side flexibility and emerging technologies such as “deep eutectic solvents” (which remove the need for high temperatures to make pulp).

The remainder (€20 billion) would need to be invested in the production of new bio-based products to help meet the industry’s other goal of 50% more added value than in 2010. In addition, CEPI anticipates nearly zero-carbon electricity purchases and a greatly reduced carbon footprint for transport.

The emission reductions set out by CEPI are conservative: they do not account for the benefits of substituting any fossil fuel-based materials, or indeed carbon sequestration in managed forests or bio-products because “we cannot measure it”, Lhôte says. “Sequestration will be a bonus delivered through new products.”

Break with the past

“This industry has turned the page,” said CEPI’s Director General, Sylvain Lhôte, in an interview. “There has been a step change.” The paper and pulp sector has stopped lamenting the economic crisis and a decline in traditional markets (due to digitalisation) and turned to face the future.

“How do we optimise? How do we add value?” These are the questions Lhôte says the paper sector is grappling with today. It is helped by technological advances that enable entirely new products or new functionalities to be added to existing products: “We master the fibres so well we can now make stretchable paper!”

At the same time, the sector continues to face traditional constraints: all products must be recyclable (half of the industry’s feedstock is recycled material). Technology is helping even with that however – nano-cellulose can help glue back together the ever shorter fibres that result from recycling, Lhôte explains.

CEPI launched an innovation competition back in 2013 called the “The Two Team Project”. This identified eight breakthrough technologies to cut the carbon footprint of pulp and paper-making. One of those was “deep eutectic solvents”. This has since turned into a “Horizon

2020” project benefiting from EU funds.

Regulatory reset

The point of the new 2050 roadmap is not only to detail the necessary investments going forward, but also the kind of regulatory framework that CEPI believes is needed to make them happen. It is no coincidence that it issued its new report on Monday, a day before EU Industry Day on 28 February.

CEPI wants a “regulatory reset”. A European Commission assessment in 2016 revealed that especially energy and climate regulations had knocked a third off the paper industry’s profitability over the last ten years. There is a handy “policy jigsaw” of what it believes is essential to its future on p13 of the new report. Part of this is keeping policies like the EU ETS predictable and investment-oriented; part of it is coming up with new risk-sharing models to facilitate demonstration projects for new technologies.

European companies are leading the charge on the bioeconomy. But if they are to continue doing so, they need money to invest. This is the message from an industry which has at least demonstrated a clear willingness to do so.