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A low-carbon future?

World Cement,

Today, 15 November 2012, The European Commission has released a report on the state of the European Carbon market, outlining plans for deeper reforms.

The Commission’s formal proposal outlines temporary withdrawal – or ‘backloading’ – of some of the huge surplus of allowances generated by the economic slowdown as it crushed demand. Even though this is a temporary measure, aimed at alleviating the pressure on the now-flooded carbon market, it still requires approval from the EU member states. Voting is expected next month, meaning that the process will not be so quick as the market had hoped. With further-reaching reforms likely to take yet more time, the market has been disappointed with the EU’s inability to take stronger action more quickly.

Predictably, the atmosphere surrounding the report isn’t 100% positive. Developing markets, such as Poland, demanded higher volumes of permits to allow them to grow and compete. The Polish Ministry for the Economy issued the statement, "Poland maintains its negative stance towards any interference with the CO2 permits market that would lead to an artificial rise in their prices." Though many EU countries are moving away from fossil-fuel dependence, Poland is still very much dependent on coal for its power generation needs.

The actual proposal made by the Commission for backloading is that the auction of 900 million allowances that would have been sold between 2013 and 2015, the first three years of the next phase of the EU Emissions Trading Scheme (ETS), be delayed until 2019 – 2020. It is not yet clear though just how much support there will be for the plan. The EU's biggest economy, Germany has not taken a formal position and representatives of heavy industry from across the continent have led opposition to anything that would drive up the price of carbon allowances.

Climate Commissioner, Connie Hedegaard said, "Market operators must have clarity before year-end on this [backload]. Our carbon market is delivering emissions reductions. But because of the oversupply in the market, the Emissions Trading Scheme (ETS) is not driving energy efficiency and green technologies strongly enough."

CEMBUREAU, the European cement association, has taken great interest in the Commission’s report and is currently analysing its details and reflecting upon its implications. CEMBUREAU will be one of the contributors to the follow-up consultation and its contribution will be guided by the need to ensure that the cement industry can continue to plan long term investment in Europe, within a stable, consistent and predictable legal environment.

Perhaps somewhat surprisingly, energy companies ranging from oil major, Royal Dutch Shell to First Solar are among those that advocate a rise in carbon price. In an open letter, these companies called for swift action and strong reforms in order to drive innovation in the energy sector and move away from the use of carbon-intensive fuels such as coal. The letter, also signed by Alstom, Dong Energy, EDF, E.ON and Statoil, called for measures that would ensure that the “ETS remains the cornerstone of EU climate and energy policy.”

CEMBUREAU’s Chief Executive, Koen Coppenholle, said that it is essential that any further reduction of CO2 emissions above the targets agreed should remain conditional upon the conclusion of an international agreement between all major GHG emitting countries. This should be undertaken with a view to establish a global crediting scheme, characterised by a comparable methodology to measure GHG emission reductions and equivalent monitoring and reduction efforts.

In the UK, carbon leakage is an issue that has been widely, with Secretary of State for Business, Innovation & Skills, Vince Cable recently engaging with the notion of transitioning the country into a low-carbon economy.

Energy-intensive industries such as steel and cement play a huge role in the journey toward a greener economy – they are fundamental to the manufacture of low-carbon goods and to processes such as wind turbine power generation. Mr Cable commented that these industries, due to the fact that energy is one of the largest contributors to their production costs, have been leaders in energy efficiency for years. However, alongside this opportunity. However, policies such as the ETS that have been put in place to support low-carbon investment have the knock-on effect of raising electricity prices for these same industries.

Though ultimately this is a transitional cost, it will have make very real short-to-medium term impact. It is estimated that energy and climate change policies will add up to 28% to electricity costs for such businesses in 2020. This will be sorely felt in the cement industry, where power is one of the greatest operating costs.

The UK’s cement industry operates in an extremely competitive global market, and with only a very limited ability to pass on an increased cost of production, soaring energy prices will have a direct effect on product profitability. This will, in turn, affect the likelihood of multinational companies investing in the UK, and price smaller manufacturers out of their own home-market as it became cheaper to import cement. These might come from countries with less stringent energy efficiency standards, raising the overall carbon footprint of the goods consumed in the UK. However, the government is trying to help the Cement industry, and other heavy industries, publishing a consultation on proposals for compensating energy intensive industries for two of the costs they face – the costs of the EU Emissions Trading System and the Carbon Price Floor. These measures would ensure that a balance can be struck between the economy, and greener industry.

Written by Jack Davidson, based on various sources.

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