Claim VS Fact:


A strong Market Stability Reserve will not harm EU industry

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Shortages pose an imminent danger to industrial installations.


The majority of industrial sectors remain with a surplus of allowances past 2020.

“The overall steel sector will be in shortage of allowances well before 2020. The EC impact assessments are flawed and structurally play down this huge impact.”

Email to ITRE MEPs, ArcelorMittal
The EU ETS has been granting free allocation to manufacturers since 2008 so that they do not encounter any undue negative effects as carbon pricing is phased in. In fact, in aggregate, every manufacturing sector was issued more allowances in Phase 2 than were needed to cover its emissions, and most will not exhaust their spare allowances before the end of Phase 3.  The accumulation of excess allowances has provided a source of potential revenue for many and insulates sectors from the effect of a high carbon price well into the future.
In the case of the iron and steel sector specifically, surplus free allowances would last until 2019. However, factoring in their past use of international carbon credits, their surplus can be stretched until 2022. In addition, the sector is entitled to use more offsets in future If these offsets are accounted for, the sector overall would not need to buy its first EUA until 2027.. Note: We include surrendered offsets because these represent sunk compliance costs which were used instead of free allowances, delaying the date by which these sectors would bear the carbon price. We also include unused offset entitlements because offsets can still be purchased much more cheaply than European allowances, protecting installations from increases in the price of carbon that may result from a Market Stability Reserve. Offsets are currently trading at €0.10/tCO2, whilst an EUA costs €7.41/tCO2 (on January 21st 2015).


Eastern European iron & steel is hit hardest by carbon costs.


Eastern Europe iron & steel installations will be in surplus well into the future

“If the EC can push through their wishes, by 2030 the steel sector will have a CO2 allowance shortage of around 50% with excessive CO2 and power prices. No steel plant can survive this, but most Eastern plants will be hit hardest.”

Email to ITRE MEPs, ArcelorMittal
With carbon leakage protections being revisited from 2021 as part of the review of the ETS Directive, an early and effective Market Stability Reserve poses no imminent threat to the European steel industry. But even if current rules were extended indefinitely, the iron and steel sector in Eastern European member states would be protected for decades.The data shows that the most relevant industrial sectors of Eastern European countries will experience a continuous expansion of their cumulative balances all the way to the late 2020s or even beyond if current rules were extended and emissions continue at the same level as today. In the case of the iron and steel sector, cumulative balances should not go negative until the 2040s in Eastern European countries, implying no need to buy a single allowance for decades. The earliest projected country in which the iron and steel sector is expected to need to purchase allowances is the Czech Republic in 2040. (Note in this example we have assumed full offset entitlements are exhausted). 
Figure 2: Projected cumulative balance for iron and steel installations in Eastern European countries (-2.2% LRF post-2020, entire offset entitlement exhausted, emissions at constant 2013 levels). Surplus projections for sectors and companies within a country cannot account for the effect of waste gas transfers, due to a lack of transparency in the EU Transaction Log. In some cases, industrial installations transfer waste gases to combustion installations together with a corresponding amount of freely allocated allowances. These transfers can occur within companies or between companies, preventing calculation of precise balances split by country, sector and company.


An early start to the MSR will dramatically increase costs for ArcelorMittal.


ArcelorMittal's allowance surplus is so huge, its iron and steel installations will not run out of free allowances before 2050!

“For ArcelorMittal Europe, an introduction of MSR with freezing of backloaded allowances by 2017 could cost us around 1 Billion Euros only until 2021 (depending on the carbon price impact).”

Email to ITRE MEPs, ArcelorMittal
It is true that since the introduction of the benchmarking system in Phase 3 of the EU ETS ArcelorMittal faces yearly allowance shortages. However, up to 2013 it managed to build up the largest cumulative surplus of free allowances of any single company under the EU ETS, even when accounting for waste gas transfers. These accumulated excess allowances can be used for future compliance and are unlikely to be exhausted until 2025 or beyond (assuming current rules were extended). ArcelorMittal’s iron and steel installations should have more accumulated free allowances than needed all the way until the year 2050.
Figure 3: ArcelorMittal’s cumulative surplus until 2050 (-2.2% LRF post-2020, emissions constant at 2013 levels, adjusted for waste gas transfers, and assuming full use of offset entitlement).


“The MSR will cause energy costs to soar.”


The impact of the MSR on energy prices will be modest

“On average the carbon price increases by up to 40% of the wholesale power price for the period 2021-2024.”

  1. Underestimating the scale of future surpluses: Eurofer’s estimations for the carbon price are outdated, with new evidence suggesting much larger surpluses and therefore much lower carbon prices in 2020. Eurofer’s price estimates seem to coincide with figures presented by PointCarbon during the Experts Meeting hosted by the Commission on June 25, 2014. At the time, the expectations for the surplus in 2020 were 2.6 billion tonnes, as suggested by the Commission. In the meanwhile, it has become clear that the 2020 surplus will probably be much larger. Preliminary evidence shows that 2014 emissions are far lower than had been widely anticipated, suggesting larger surplus estimates, as prepared by the UK government (3.1 billion) and by Sandbag (4.5 billion), are more likely. This in turn means carbon prices are likely to be lower than the values cited by Eurofer.
  2. Ignoring the safety features built into the MSR: The MSR by its very design prevents the market from becoming too tight. This is because the MSR attempts to steer the surplus into a zone between 400 and 833 Mt, where the Commission deems that large-scale market players’ hedging needs for EUAs are satisfied. As long as this matter is safely taken care of, enough slack in the market is ensured for other players. This factor alone ensures that price spikes are defused. However, this buffer can only become more pronounced in the future, because hedging needs are set to decrease for a number of reasons:
    1. As more and more renewable electricity continues to be fed into grids at a priority, electricity generation in thermal power plants (the only ones requiring carbon hedging) diminishes progressively because of diminishing residual demand.
    2. An increased role of fluctuating output renewables in electricity generation means that it is no longer meaningful for utilities to hedge a year or more ahead. Instead, they require only much smaller hedging volumes for significantly shorter time horizons.
    3. New regulations introduced in response to the financial crises of the past years have increased credit requirements for derivatives trading, making taking out lengthy hedging positions more costly.

    All three of these factors indicate that hedging requirements are contracting. This frees up allowances for other market players and puts additional downward pressure on the carbon price, making fears of rapidly escalating prices overstated.

High emissions forecasts, and high hedging assumptions have driven up the price forecasts of many analysts, but these are steadily being revised downwards in light of new evidence in both areas. Point Carbon recently issued a media advisory anticipating that the average price of carbon would be €23 per tonne for 2021-2030 under the most ambitious version of the MSR looked at by Eurofer (2018 start with backload placed in the MSR). This price is down €4 from their forecast for the same scenario just six months earlier (€28/tonne), and is now much closer to the prices that were then forecast for the Commission’s much more modest proposal (€24/tonne with 2021 start date and backload released to market).


“Carbon leakage protections for industry are being phased out.”


Industry has just received a handout worth €39 billion in carbon leakage protections over 2015 to 2019.

“An early introduction of Market Stability Reserve (MSR), with possible freezing of backloaded allowances, increases the steel sector’s costs even more, as it has much less carbon leakage protection against the higher CO2 and power price impacts […] politically it will be only possible to solve this current impact at the Post-2020 ETS Review”.

Email to ITRE MEPs, ArcelorMittal

The current carbon leakage list covers 99.73% of manufacturing activities covered by the ETS and provides continued free allocation according to efficiency benchmarks until at least 2019. The recent 2030 Climate and Energy Package, agreed in October 2014, explicitly states that carbon leakage rules will be revised and improved to provide better protection in the future against the risk of competitiveness impacts. Carbon leakage provisions are not therefore being phased out, in fact they are likely to be improved making them more targeted – rewarding companies who invest in increased production (using better production threshold triggers) and looking again at the balance between allowance allocations to the power sector where emissions are rapidly declining, and industrial sectors where the transition to low carbon technologies is yet to get underway.
Instead of lobbying against the introduction of an effective MSR ArcelorMittal should be offering concrete proposals to improve the free allowance allocation process post 2020 and also suggesting policies such as the NER 400 which can form part of a policy package to incentivise investment in lower carbon technologies in industrial sectors including support for CCS.
On Wednesday, September 24, 2014, the EU’s current provisions for protecting sectors deemed at risk of carbon leakage were extended until 2019, despite an impact assessment from the Commission clearly indicating these protections were exaggerated. Manufacturers’ carbon leakage exposure has been assessed using a carbon price of €30/tCO2, but the real price of carbon today (January 21, 2015) is €7.41. A Commission Impact Assessment estimated that using this inflated price to calculate leakage exposure awarded additional carbon assets to industry worth €39 billion.
Sandbag calculates that a 99.73% of manufacturing activity has been defined as at risk of carbon leakage, indicating that effectively all manufacturers have been granted extra free allowances on this basis. The extension of an already exaggerated carbon leakage list, calibrated for a vastly inflated carbon price, hardly counts as a phasing out of protections or an attempt to increase costs for manufacturers – iron and steel or otherwise.
ArcelorMittal is right to say that carbon leakage rules will not be revisited until the post-2020 ETS review, but this is no excuse for delaying the implementation of the market stability reserve. The European Council and several parliamentary groups have expressed clear support for extending and improving the carbon leakage protections offered from 2021. However, the ETS remain first and foremost an instrument of climate policy, and the current discussion in the European Parliament is aimed at correcting a fundamental design flaw – that of an inflexible supply that leads to massive surpluses, which in their turn render the entire scheme ineffective. Arguing that repairing the EU ETS should be deferred until 2021, after the competitiveness concerns of already protected industry have reviewed, needlessly delays these urgent and essential reforms.


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