Key Guiding Principle
The EU ETS should be a more dynamic system which safeguards and rewards the growth of sectors identified at risk of carbon leakage. A lower, even more dynamic threshold (i.e. <15%) is need to better reflect industrial requirements for free allocation. Furthermore, under allocation in times of growth can be avoided with a better designed, fairer, more dynamic system.
1. Determination of the historical activity levels
According to article 11(1) of the EU ETS Directive, free allocations in phase IV must derive from activity levels based on the 5-years baseline 2014-2018. We recommend to introduce the possibility to omit from the calculation one or more years which may be not representative of the normal production level. For example, the average of the 3 years with the highest production within the baseline period may be used.
2. Adjustments due to production changes
We welcome the possibility, introduced in article 10.a paragraph 20, to better align the historical activity levels to the actual production, based on a 2-years rolling average: this approach helps to prevent both under and over-allocation, and helps safeguarding the growth of sectors identified at risk of carbon leakage.
However, as the directive doesn’t provide further practical details, we would recommend that:
The assessment through the rolling average is started already in 2019, to include from the start of phase IV any relevant production change occurring between 2018 (end of baseline), and 2021. This would honour investments for production growth already in place, and prevent overcompensation if production is reduced
The 2-year rolling average is calculated every year of phase IV, to ensure a regular update of the activity levels
The actual changes in the allocation, where due, are immediately implemented in the year following the assessment, without time lag
3. Absolute thresholds
In addition to the threshold of ±15%, Recital 12 of the EU ETS Directive 12 which states that “The Commission should be able to consider further measures to be put in place, such as the use of absolute thresholds regarding the changes to allocations, or with respect to the deadline that applies to the notification of changes in production” provides the EU Commission the possibility to introduce a more tailored, dynamic system to adjust the amount of free allocation in line with production changes.
This possibility should be used to incentivise efficiency improvements and enable growth in those sector’s deemed exposed to carbon leakage. Production facilities should have the possibility to receive additional allocation for this increased production, even if below the threshold of ±15%.
Creeping projects increase due to productivity and efficiency increases is a general economic fact throughout the non-ferrous metals industry.
Indeed, installing new capacity entails significant costs and thus, the most cost-effective and proven way to meet the growing demand is to increase the productivity of existing assets, through continuous improvement and targeted investments.
To take the example of aluminium; virtually all aluminium smelters gradually increase over time the intensity of the electricity used in the electrolysis process, hence their production. This technique, referred to as “creeping”, allows them to use the main infrastructures, while upgrading the computer control system, and the electrical and auxiliary equipment. Creeping projects allow a yearly increase of production between 0.5% and 1%, providing a slow but steady increase over a substantial amount of time, additionally improving energy efficiency and overall performance. These production increases would however not be considered by the threshold of ±15%, thus making future creeping projects more unattractive.
Such a regulatory system undermines the attractiveness of Europe for our sector as a future investment destination for such projects.
The views and opinions expressed here are entirely those of the author(s) and do not reflect the official opinion of the European Commission. The Commission cannot guarantee the accuracy of the information contained in them. Neither the Commission, nor any person acting on the Commission’s behalf, may be held responsible for the content or the information posted here. Views and opinions that violate the Commission’s feedback rules will be removed from the site.