CIA gives cautious welcome to EU ETS Phase 2 draft allocation plan

The Chemical Industries Association (CIA) today gave a cautious welcome to the Government’s allocation plan for Phase 2 of the EU Emissions Trading Scheme (ETS) but highlighted concerns over increasing indirect cost impacts and long term prospects for direct costs.

The Association is relieved to note that the plan proposes to allocate emissions allowances to manufacturing industry according to projected need after accounting for existing reduction requirements under other policy instruments. However, the plan does require additional carbon emissions reductions from the electricity supply industry (ESI) and also proposes to auction a margin of their allowances rather than allocate them for free. So while manufacturing escapes direct EU ETS cost increases from the EU ETS, it is inevitable that higher indirect costs will be transmitted through the electricity market.

Moreover, imposition of tougher targets on the ESI will encourage more switching from coal to gas as the primary energy source. This will aggravate the acute problems already being experienced in the UK gas market. Supply problems during the past winter triggered record high spot market prices and many energy intensive manufacturers were forced to curtail production. Forward wholesale prices for the next three winters are all well above those available to competitors in Continental Europe and elsewhere.

In terms of other policy instruments, the chemical industry has already pledged significant gains in energy efficiency under its sector Climate Change Agreement (CCA). CIA applauds the reference in the EU ETS Phase 2 NAP consultation to the importance of Better Regulation, and looks forward to Government addressing the overlap and conflict with schemes such as the CCAs and related Climate Change Levy, the Integrated Pollution Prevention and Control regulations, and the Large Combustion Plant Directive (LCPD) which also impose controls on site emissions.

However, CIA is unable to support the Government’s stated long-term objective to move away from free allocation of EU ETS allowances under a harmonised EU framework. The EU chemicals sector would be significantly disadvantaged by any requirement to bear the full cost of carbon unless this was imposed on a global basis. Addressing this objective by auctioning allowances would add further uncertainty to direct cost increases.