The role of EU ETS and other policies ‐ insights from Climate StrategiesStudy on Steel and Cement Sector

CDC Climate , 14.11.2014

Karsten Neuhoff

Resource Use / Energy & Emissions

Economic Output / Consumption

“Optimising”behaviour 

“Transforming” behaviour 

Innovation & evolution of 

complex systems

Real‐world individual and organisational decision‐

making

“Satisficing”behaviour 

A framework for different elements of an energy transition1

Source: Grubb, Hourcade & Neuhoff (2014): Planetary Economics, Energy, Climate Change and the three domains of sustainable development. Routledge.

1 What is needed to unlock CO2 abatment opportunities?

2 Why inclusion of consumption and free allocation?

3 How to implement inclusion of consumption?

4 Conclusion

3

Carbon Control andCompetitiveness Post 2020: Cement ReportKarsten Neuhoff, Arjan van Rooij, Misato Sato, Oliver Sartor , Manuel Haussner, 

Andrzej Ancygier, Ian Christmas, Anne Schopp, William Acworth Phlilippe Quirion, 

Ayse Tugba Atasoy, Bruno Vanderborght , Benedikt Mack, Nagore Sabio, Jean‐Pierre Ponssard

++++++ Project team

Analysis based on the following workavailable at www.climatestrategies.org:

Present state of the European steel industry

• In 2013 steel use in the EU still 25% below the pre‐crisis levels;

• Steel demand unlikely to return to 2007 tonnage levels;• Profit margins on average below level to justify re‐

investment;

1

Present state of the European steel industry1

6

Data: World Steel Association, 2013, Global Steel Statistics; Eurostat Structural Business Statistics

CO2 abatement opportunities in steel1

Emissions / t steel

Process related emissions

Illustration

BF / BO

F

Scrap(recycling)

Iron ore

EAF

1,88 tCO2/t Steel

EU Steel Production

168 Mio. t

Fuel relatedemissions

4. Substitution/efficient steel use

2. Break through technologies (e.g. CCS)

3. Higher quality / lower weight steel

DRI  /EAF

1. Ene

rgyEfficiency of

prod

uctio

n

5.Higher recycling rates

Low‐CElectricity

1‐ Energy efficiency

• 10‐15% Emission reduction potential in Western Europe;

• Investment limited by • Short pay back requirement (typically 2‐4 years, now shorter)

• Low profits and growth prospects of industry

• Financial capacity of industry limited

2

2 ‐ Breakthrough technologies pursued with ULCOS2

• Expectation of climate policy initiated ULCOS projectWhy have ULCOS projects stalled?• CCS‐based technologies only viable with permanent carbon pricing regime• Steel firms not prepared to finance  and take whole risk (EC was not prepared to take 

risk share under NER 300 facility)• (Political challenges of CCS in Europe)

R&DDemonstration(Laboratory)

Pilot plant (small scale)

Pilot plant (large scale)

Commercial Installation

Electrolysis: laboratory scale only, requires C free electricity, very long shot

Top Gas Recovery: pilot plant proven, but €300 mio. 

demonstration plan cancelled for lack of suitable funding

HISARNA pilot plant working at Ijmuiden but funding in doubt 

for scale‐up

CO2 free(power)

20‐30% CO2 savingswith CCS 60‐75%

3 – Higher value steel products to deliver service with less weight2

• Automotive 30‐40% savings in body weight over the last 10 years• Innovative high strength steel & forming techniques (tailored blanks, hydroforming)

• With competitive pressure from alternative materials  

• Facilitated by value chain integration & regulatory requirements• UltraLight Steel Auto Body  ‐ private sector initiative 1990th

• To meet fuel efficiency standards lighter components required 

• R&D expenditures maintained through crisis period

4 – More efficient use of steel in finished products

Example buildings:• Many products made of steel could be 25‐30% lighter (technically)• Steel use in buildings  can be saved, for example, by using tailored 

shapes, supporting multiple loads with fewer structures, aligning loads to avoid bending, avoiding over‐specification of loads etc. 

• But several barriers inhibit change:• Excess use of steel can be cheaper than using less (e.g. risk of 

component failure, higher cost during design, quality control)

• Fragmented value chain 

• Existing standards and regulation (e.g. minimum requirements instead of target requirements)

(Allwood et al 2012)

2

5 – Recycling of scrap

• Recycled steel has emissions up to 75% below primary steel• Availability increases with maturity of economy, EU scrap=64% 

demand• EU exports around 20% of its scrap because 

• Typically BOF furnaces only use 25% scrap

• EAF can use 100% scrap, but share small outside Spain and Italy

• Global CO2 emissions not influenced – only regional increase

–> no need to constrain scrap‐trade

• Recovery rates vary across products• Cars (almost 100%), steel packaging (74 %), buildings (lower)

–> unlock improvement potential

• Declining quality of scrap due to increasingly complexity  of products–> explore options to improve separation during design & recovery.

2

Policy requirements for investment in modernization1

13

Strengthen

ing EU

 ETS

Carbon

price alon

g value chain

Engagemen

tof a

ll actors

Fund

ing of te

chno

logy 

inno

vatio

n

Unlocking efficiency potential x

Business case for break‐through technologies like CCS x x x

Higher value steel products andefficient use x x x x

Increasing recycling rates x

& inclusionof con‐sumption

Free allocation

Incentives retainedwith leakageprotection*:

Free allocation

* Effect explained on part 2

Cement d

emand (EU 27)

Emissions / t cement 

Fuel related emissions (35%)

Process related emissions (65%)

Substitution/efficient cement use

Carbon Capture & Sequestration

New cement types

CO2 abatement opportunities in cement1

14

Lower clinker contentEnergy Efficien

cy

Pre‐treated waste

Biom

ass w

aste

Policy requirements for investment in modernization1

15

Strengthen

ing EU

 ETS

Carbon

 pric

e  along

 value chain

Engagemen

tof a

ll actors & re

gulatio

n

Fund

ing of te

chno

logy 

inno

vatio

n

Biomass and fossil waste x x

Unlocking efficiency potential x

Clinker substitutionX x x

Business case for break‐through technologies like CCS x x x

Low‐carbon cement and efficientuse (building practices, etc.) x x X x

15

& inclusionof con‐sumption

Free allocation

Incentives retainedwith leakageprotection*:

Free allocation

* Effect explained in part 2

1 What is needed to unlock CO2 abatment opportunities?

2 Why inclusion of consumption and free allocation?

3 How to implement inclusino of consumption?

4 Conclusion

16

What is the economic effect of output based allocation?2

17

Non clinkercement cost

Non cementconcrete cost

Non CO2 clinker cost C02 value

Free     allocation

Clinker price

Cement price

Price for concrete wall

Carbon cost not in tradedgoods

Carbon costs are not reflected in prices of intermediate and final goods – other thanfor carbon intensity above allocation.

What is impact of output based allocation on environmental effectiveness of EU ETS?2

18

Non clinkercement cost

Non cementconcrete cost

Non CO2 clinker cost C02 value

Efficiency/fuel shiftFree 

allocation

Incentives for mitigation other than for upstream efficiency are largely eliminated.

CCS

Roll-out of CCS wouldhave to be funded byconsumers of othersector that acquiresallowances. This ispolitically not stableand thus not crediblebusiness case.

Clinker subst. / low‐C cement

Efficient cement & concrete use

Without carbon costrelfected in clinker, cement or concrete, carbon price does not create additional market opportunitiesfor clinker substitution, low-carbon cementetc.

Introduction of a CO2 charge for downstream consumers

•What if, in addition to free allocation at the benchmark level, we add on a CO2 charge for producer of benchmark product?

•To avoid distortions of competition, the liability for thischarge could be deferred down the value chain to final product consumer (following example of excise liabilitieson alcohol, tabbacco, energy).

•EU already has already a computerised system in place used for alcohol, tabacco …. 

2

19

What is the economic effect of combining output based allocation with inclusion of consumption in EU ETS?2

20

Non clinkercement cost

Non cementconcrete cost

Non CO2 clinker cost CO2 value

Clinker price

Cement price

Price for concrete wall

Carbon cost not in tradedgoods

Upstream production and final European consumption bears the full carbon cost, whiletraded goods bear at most the cost for emissions above free allocation level.

C02 value

Free allocation

CO2 value

Consumptioncharge

Charge for final consumption in Europe will create incentievsand impact decisionsalong the value chain..

What is impact of combining output based allocation with inclusion of consumption on environmental effectiveness?2

21

Non clinkercement cost

Non cementconcrete cost

Non CO2 clinker cost C02 value

Efficiency/fuel shift

Freeallocation

EU ETS can deliver the full incentives for all mitigation opportunities.

Clinker subst. / low‐C cement

Efficient cement & concrete use

The consumptioncharge per tonne isreflected in up-streamchoices on clinker(substitutes).

CCS

The consumptioncharge recoversforgeone auctionrevenue from freeallocation and thuscompensates fordistributional impactsof free allocation.

Consumptioncharge

1 What is needed to unlock CO2 abatment opportunities?

2 Why inclusion of consumption and free allocation?

3 How to implement inclusion of consumption?

Administrative process

Which materials to cover?

How far down the value chain to trace materials?

Implication for free allowance allocation at installation level

Legal status

International perspective 

22

Administrative process3‐1

23

C02 value

Free     allocation

Liabilitytraced withmovement ofgood containingsteel,clinker … (Analogous to Excise movement & control system    

EMCS)

Create liability with production per tone of steel, clinker.

Upstream production and final European consumption bears the full carbon cost, whiletraded goods bear at most the cost for emissions above free allocation level.

Installations remain in EU ETS and have tosurrender allowancesfor emissions

Installations receiveallowances for freeproportional to recentproduction volumemultiplied bybenchmarkImporting firm liable 

for steel, clinker in imported goods.

Liability vanishes with export of good with steel, clinker from EU.

Consumptioncharge

Levy charged with release for EU consumption at production benchmark * ETS allowance price

Consumptioncharge

Consumption chargerecovers auctionrevenue forgonebecause of freeallocation

Administrative process

•Create liability with production in/import to EU territory•Measured in tons of steel, clinker .. (not steel type)

•Embodied in imports (e.g. steel in cars  above threshold)

•Trace liability with movement of material•Analogous to EMCS (Excise movement & control system)

•Electronic reporting to national authority by both parties ensures correct transfer of liability

•Liability vanishes with export from EU

•Levy charged with release for EU consumption•At primary production benchmark * ETS allowance price

•To national trust fund for climate action

3‐1

24

Which materials to cover

• Internationally tradable carbon intensive materials: •Potential for carbon price pass through small/uncertain

•Value of carbon price pass for efficiency of EU ETS high• Include materials that are close competitors

• to avoid distortion of inter‐material competition

•Limit number – e.g. to clinker, steel, aluminum and copper

3‐2

25

Why focus on limited set of carbon intensive materials?3‐2

26Industrial activities with the highest cost increase from carbon pricing, and their contribution to UK GDP, assumed carbon price increase 20 €/t CO2, electricity price increase 10 €/MWh.

How far down the value chain?

• Within Europe: self‐selection whether or not to handle material (containing products) under levy suspension arrangements 

• Imports if pre‐defined categories of Standard International Trade Classification (SITC) or at self reported or at average level

• Imports ‐•For imported products

•Within product categories

•R

3‐3

27

Implication for free allocation at installation level

•Consumption charge is output based‐> Can be basis to move to output based allocation

•Consumption charge recoups allocation and incentives‐> allocation at full benchmark is possible

•Exports should not be subsidised through EU ETS (WTO)‐> defines upper limit of allocation

3‐4

28

•Reason for charge rather than obligation to surrender allowances is ease of administration 

•But level of charge based on EU ETS allowance price (ECJ ..)•Focused on carbon (bearing component) of product•Mechanism to ensure environmental objective of EU ETS ispreserved (incentivs for mitigation actions)

•Revenue goes into trust fund (ECJ ‐ no gov. revenue, no tax) •Revenue used to pursue climate action that was supposedto be funded with (forgone) auction revenue under EU ETS

•Some revenue used to retire allowances to compensate fornet‐imports of carbon embodied in trade

3‐5

29

Legal status – why is it part of environmental regulation?

International perspective 

• In principle WTO compatible •consumption charge

• if implemented without discriminatory components

•Politics different to Border Carbon Adjustments•Charge paid by final consumer, not at the border

•Directly reflects aim to reduce consumption of CO2

•Needs to be early discussed with international partners• to explain rational• to demonstrate non‐discriminatory appraoch

3‐6

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Why inclusion of consumption and free allocation?

Facilitates investment in all abatement opportunities:• Establishes full carbon price to preserve incentives for innovation and investment in all modernization opportunities

• Costs allocation to consumers presents a credible perspective for break‐through technologies

Long‐term stability for investment business case & credible leakage protection:• Free allocation at full realistic benchmark without cross‐sector reduction factorpossible as full carbon price signal retained and auction revenue recovered.

• Allocation at recent production volume matches consumption charge.

Simple policy framework for decision makers:• Without conflicting interests, less uncertainty about future allocation volumes.• Strategic decisions can assume full carbon price signal and no leakage risk(with free allocation and consumption charge only administrative details)

4

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