Posts Tagged ‘European Union Emission Trading Scheme’

EU OKs compensation for big energy users hit by power costs

The European steel industry is undergoing a transition linked to its current economic difficulties and the slowdown of steel demand. At the same time, steelmakers are concerned by added regulatory costs. The environment would, in theory, benefit from an increase in EAF steelmaking capacity as opposed to blast furnace-basic oxygen furnace capacity. However, future electricity costs, the main cost element of EAF steel, will determine the relative level of investment.

SBB 24 May – The European Commission has adopted a framework under which member states may compensate high energy users, including steel producers. This is in response to the higher electricity costs expected to result from a change to the EU Emissions Trading Scheme as from 2013.

The regulation will allow subsidies of up to 85% of the increased cost faced by the most efficient companies in each sector from 2013 to 2015, a cap that will gradually fall to 75% in 2019-2020.

However, European steel industry body Eurofer says that is grossly insufficient and will not restore the level-playing field with competitors outside the EU.

At first glance, the most impacted products (EAF steel and downstream) would be covered by a maximum 50-60% of the indirect CO2 cost, should member states give the maximum they are allowed to as per guidelines, a spokesman for Eurofer told Platts Steel Business Briefing in an emailed response to questions on Wednesday.

“Given the current economic situation and the state of public finance in the EU, we don’t expect member states to give away much,” he added.

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EU OKs compensation for big energy users hit by power costs

European steelmakers have oft bemoaned the costs of emissions trading systems. This includes the indirect costs from higher energy prices as weell as the direct costs of emitting greenhouse gases. Now the European Union has agreed to allow some compensationfor higher electricity prices. Although this will not eliminate the added costs to steelmakers, it should, if memebr states provide the cash for compensation, mean that the future of EAF steelmakers in Europe will be decided by market conditions, not by environmental regulation.

SBB 24 May The European Commission has adopted a framework under which member states may compensate high energy users, including steel producers. This is in response to the higher electricity costs expected to result from a change to the EU Emissions Trading Scheme as from 2013.

The regulation will allow subsidies of up to 85% of the increased cost faced by the most efficient companies in each sector from 2013 to 2015, a cap that will gradually fall to 75% in 2019-2020.

However, European steel industry body Eurofer says that is grossly insufficient and will not restore the level-playing field with competitors outside the EU.

At first glance, the most impacted products (EAF steel and downstream) would be covered by a maximum 50-60% of the indirect CO2 cost, should member states give the maximum they are allowed to as per guidelines, a spokesman for Eurofer told Platts Steel Business Briefing in an emailed response to questions on Wednesday.

“Given the current economic situation and the state of public finance in the EU, we don’t expect member states to give away much,” he added.

Steel industry may support carbon prices in medium term

SBB 14 October Demand for carbon credits from the European steel industry will help to support prices in phase III (2013-2020) of the European Emissions Trading System (ETS) says carbon trader and researcher, Marius Frunza. This source of demand has not been properly factored in by many carbon market analysts, Frunza claims.

As steel production was cut in the aftermath of the financial crisis, the industry was left with an over-allocation of European Union Allowances (EUAs). But from 2013 the industry will need to buy in EUAs, especially if production levels are high. This will result in an entirely new source of demand for EUAs, Frunza points out.

On the other hand, the surplus EUAs built up over 2008-2012 could take some time to be exhausted and so the effect on EUA prices may not be large, counters Barclays Capital’s Trevor Sikorski. The electricity sector will continue to be the main source of demand for EUAs in 2013-2020 and so should have a far more significant effect on prices, he adds.

In the short term, with the eurozone debt crises unresolved, EUA prices are unlikely to move from their current levels, Frunza believes.

EC could manipulate carbon prices

The cap-and-trade system of pricing greenhouse gas emissions is intended to provide the financial incentives that could come from a system of taxes in a more efficient way by using a market mechanism to determine prices. However, this contains a contradiction that has not been fully resolved. When the market sets a price that no longer adequately incentivises investment in reducing emissions, should policy makers stick to their free-market principles or act to ensure that industry will face costs if it does not invest in green technology?

At the end of June the European Commission stated for the first time that it might restrict the supply of carbon credits to support prices. This would, in effect, place the commission in a position similar to a central bank, controlling the supply of credit to maintain the value of its currency. While DG Climate Action views this as a legitimate means to ensure its emissions reduction targets are achieved, many energy intensive industries complain that this violates the market principles of the cap-and-trade scheme.

SBB 27 June The European Commission (EC) has said for the first time that it may increase carbon credit prices by setting aside credits from the Emissions Trading System (ETS). Maintaining high prices is necessary to avoid any one sector from getting a “free-ride,” DG Climate Action spokesperson, Isaac Valero-Ladron tells Steel Business briefing.

The EC energy directorate’s energy efficiency programme could reduce demand for European Union Allowances (EUAs) from power companies. If this causes EUAs to fall, sectors which have not reduced their emissions will face lower costs and have less motivation to reduce their own emissions, Valero-Ladron points out.

However, artificially increasing the price is not in line with the directive which covers the ETS, Eurofer complains. This was intended to create a system which reduced greenhouse gas emissions at the lowest possible cost. As long as the shrinking cap on emissions in the ETS is met, the price should remain low, it argues.

The energy efficiency programme has been seen as a shift in focus away from the ETS. The December 2011 EUA contract fell more than 9% on 23 June to €13.37/t ($19/t) after the programme was launched.

But the EC will ensure that the ETS continues to function, says Carine Hemery of French carbon and energy analysts, Orbeo. This is likely to mean setting aside EUAs to reduce supply. But this could add an element of political risk to the carbon markets. If traders are put off by this, the liquidity of the market could suffer, she warns.

Carbon markets may exacerbate steelmakers’ costs

European steelmakers are expecting costs from the Emissions Trading System (ETS) to increase. By how much they will increase depends largely on what happens to the price of carbon. However, just as steelmakers have limited experience of the carbon markets, market traders and analysts have little experience of the steel industry. Dialogue between the two sectors could be beneficial to both sides.

SBB 11 April Both the European and global carbon markets could significantly increase costs for EU steelmakers, while at the same time reducing the potential for offsetting those costs, speakers at Steel Business Briefing’s Green Steel Strategies conference in Brussels argued.

European Union Allowance (EUA) prices are expected to rise to around €40/tonne by 2020, according to forecasts presented by Carine Hemery of carbon market analysts Orbeo. Moreover, the amount by which steelmakers can cut their costs by offsetting with UN carbon credits, called Certified Emissions Reductions (CERs), could fall from around €3-4/t currently to just €1-2/t in 2013-2020, she adds.

The December 2011 contract, which has the most liquidity, has consolidated slightly over the last week to €16.97/t on 7 April on the London-based European Climate Exchange (ECX). The December 2011 CER contract also consolidated to €12.97/t.

The carbon markets will have to adjust to a situation in which industrial sectors are buying rather than selling EUAs, says Barclays Capital carbon trader Ben Readman. Utility companies tend to hedge their EUA costs up to three years in advance. However, industrials do not want to sell this far forward, especially as in three years’ time they are also likely to have a shortfall of credits.

Some EU carbon credit registries could be closed ‘for weeks’

The European Emissions Trading System has often been at the centre of controversy. However, in spite of the uncertainty surrounding the market, prices have remained stable and even risen. This may suggest the market is more resilient than many assume.

SBB 27 January Europe’s carbon credit spot markets remained closed for business yesterday as national carbon registries remained unable to transfer credits. Furthermore, the most troubled registries could remain closed for far longer than expected. OTE, the company responsible for the Czech registry, has told Steel business Briefing that re-opening could be ‘a matter of weeks’ rather than days.

The theft of 450,000 European Union Allowance (EUA) carbon credits from the Czech registry and a hacking attack on the Austrian registry led the European Commission to block transfers of carbon credits until at least 26 January, as previously reported.

The registries hold the carbon credit accounts of participants in the Emissions Trading System (ETS). EUAs can be used to account for greenhouse gas emissions equivalent to one tonne of carbon dioxide each by European industrials in the ETS. It does not appear that steelmakers’ EUAs have been taken.

Registries will now remain closed until an independent assessment of security has been carried out on a country-by-country basis and this has been verified, the European Commission says. However, registries which have been affected by theft must also prepare a full report, which will delay re-opening even further.

The carbon market is unlikely to be strongly affected, analysts tell SBB. Spot trade can be as little as 5% of an exchange’s trading volumes, says Trevor Sikorsky, head carbon analyst at Barclays Capital. “It is a big blow to the image of the market…but it does not change the fundamentals,” Emmanuel Fages of carbon market analysts Orbeo adds. March 2011 EUA futures were settled at €14.69/t ($20.13/t) on 26 January on the London-based European Climate Exchange, up some €0.50 from a week earlier.