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This week Dutch think tank CE DELFT launched a timely new study into the risk of EU companies being exposed to ‘Carbon leakage’ i.e. being forced to relocate to other parts of the world because of carbon constraints. The report showed how the original assumptions used to decide who to grant free allowances to compensate for this risk is now grossly out of step with reality. Looking again at the carbon leakage list with more up to date assumptions including a carbon price of €12 as opposed to the €30 price originally used, the number of sectors exposed to carbon leakage is dramatically reduced from around 90% to around a third.

At the launch event sparked an interesting debate sprang up amongst the attendees and unsurprisingly the question of next weeks European Parliament vote on whether to withhold 900m tonnes from the ETS auctions was raised. Dr. Wolfgang Weber from the chemical company BASF, also representing the trade association CEFIC was on the event panel of speakers and he argued strongly against any such intervention. This is an all too common line from industry and deeply frustrating since it is clear that the ETS is one of the most flexible and cost efficient policies imaginable giving industry many opportunities to mitigate any costs it might impose and also rewarding financially those that move to embrace a low carbon investment strategy.

BASF are an excellent case study in how the ETS works and how it can provide financial benefit to well run companies.

BASF have never, in the history of the EU ETS, been required to pay for their CO2 pollution. As the graph below shows their emissions have never exceeded the number of free allowances they were given. As a consequence they have amassed a surplus of some five million allowances which they received for free and which they can use in subsequent phases. On top of this BASF shrewdly generated its own offset carbon credits in its chemical works under the UN’s Joint Implementation mechanism which allows offsets from projects in Europe outside of the ETS cap. The two projects in its Ludwigshafen site in Germany have produced millions of carbon credits from destroying nitrous oxide. Already BASF have used 1.6 million of these credits (from 08-11) to count towards its carbon commitment under the EU ETS, allowing them to bank the more valuable free allowances they received or to sell them on at a profit. This particular perk will come to an end because the EC has banned these creditsfrom the EU ETS and the scope of included installations has been extended to include N20 production. Nevertheless it serves to illustrate just how well some companies are doing out of the ETS whilst still claiming it is damaging their competitiveness and therefore trying to limit any attempts to make it more effective.

BASF

It is sometimes said that Sandbag is against companies profiting from the carbon market. This is not true. We like the fact that the ETS rewards well run and efficient companies, who move quickly to invest in projects that will be rewarded by the market. What Sandbag does take issue with is the hypocrisy of companies who push against strengthening the EU ETS despite being totally insulated from its costs.

What is particularly sad about BASF’s current position is that it’s coming from one of Europe’s truly world class companies. This is far from fake praise; I have toured their Ludwigshafen site and seen first-hand the incredible work that is done there. Excelling in environmental standards and developing cutting edge technologies which make downstream products lighter, more sustainable and more efficient. What’s more there are efficient in their production, among the most efficient in their industry, which means they will rightly be favoured when it comes allocations according to benchmarks. These are the companies that the EU needs to ensure can grow and help strengthen our economy. And the ETS helps do just that at the moment though this is scarcely mentioned. In the future, however, as the CE DELFT study shows even under their updated set of assumptions BASF and other chemical producers could still be exposed to the risk of carbon leakage. The measures currently protecting them such as offsetting and free allocation will however run out post 2020 if nothing in the current policy framework is changed. It is therefore completely valid for BASF and others to be calling for reforms of the ETS in the longer term and we support them in this – we do not, however, agree that this means holding back environmental ambition for everyone in the scheme today.

We sincerely hope that next week’s vote on back-loading passes and the ETS is restored as the primary EU climate policy. If it does not the very future of the policy could be in jeopardy as 27 Members States are all forced to consider their own unilateral alternatives to the failing EU wide carbon pricing policy. If BASF are not careful they could be helping to cut off the hand that feeds them and the alternatives may not be as easy to work with as the current system. The UK’s carbon floor price gives a taste of things to come; how long could Germany continue on its Energiewende without a meaningful price signal coming from the EU ETS?

We want to work with BASF to find solutions for their genuine exposure to carbon leakage post 2020. We can only do this if the policy survives – let’s hope MEPs can see through the exaggerated industry lobbying and make the right decision in Strasbourg next week.