A recent report by the consultancy Ecofys for the European steel association Eurofer suggests steel companies face costs of €28/tonne of steel to comply with ETS obligations by 2030. However, at Sandbag we are sceptical that the proposed revision to the Emissions Trading Scheme (ETS) will result in the costs that some fear. The European Commission must urgently launch a new industrial strategy for the EU, but must also go further with ETS reforms to build an environmentally-effective and cost-effective carbon market.
As with any modeling exercise, Ecofys has had to make some assumptions. Sandbag has the following challenges around these assumptions:
The study ignores the legacy surplus of the ETS.
It now almost goes without saying that the steel companies, in common with many others under the ETS, have accumulated enormous reserves of emissions allowances, freely handed out by the European Commission. However, that fact is notably absent from the Ecofys report, which only considers Phase 4 costs (post-2020).
Sandbag conservatively estimates the steel sector today has a cumulative surplus of 220.63 million free allowances. At today’s carbon price of €8.41, that’s a cash equivalent of €1.85 billion that steel companies can use to offset against future costs. (More info in our recent blog: Green taxes are not killing UK steel)
The Ecofys definition of the steel sector is unclear.
Ecofys say they are analysing a group of 437 installations, after excluding 112 installations at the behest of EUROFER. We see 481 installations in the EUTL sectors associated with steel ("Iron and steel", "Coke ovens" and "Metal ore roasting"). No matter how we try to adjust the data, we have been unable to reproduce the group that they are looking at. Without this list of facilities, it is impossible for us to form a judgement on whether their analysis group is appropriate. Some unexpected installations are specifically excluded, such as forges and foundries, which are fundamental to the steel process. The free allocations of these excluded installations could significantly influence the outcome of the analysis (Sandbag has contacted Eurofer and Ecofys for information on these exclusions, and we will update when it becomes available).
The carbon price Ecofys uses is higher than Sandbag expects.
The report relies on the PointCarbon price forecast. Sandbag forecasts lower electricity consumption and greater renewables build-out, so we expect a much larger surplus for the whole ETS, which will lead to prices much lower than PointCarbon expect. Without significant new supply side reforms, Sandbag does not expect the price to rise much above €10 in the near term.
The Ecofys growth rate of the steel sector (1.15%/year) implies that the steel sector will be 5% larger in 2020 than it is today.
Given overcapacity in China, leading to recent steel dumping issues, as well as the British closures, this looks optimistic.
Ecofys expects compensation for indirect costs to be modest.
The ETS Directive permits all Member States to grant compensation for indirect costs, but to date only a handful do so. However, a growing number are considering compensation, so a projection based on past practice may quite significantly underestimate how much the steel sector might receive in the future. Again, given recent closures, this could change quickly if Member State governments respond.
Net carbon costs figure from Ecofys's report 'Impact Assessment of the ETS Revision' (Page 7)
The above chart, taken from the Ecofys report, shows the cost of carbon per tonne of steel. It would not exhibit the jump in 2029 and 2030 if the Phase 4 ETS is equipped with a tiered free allocation system.
The jump in costs most likely stems from less free allocation given to the sector due to the introduction of the cross-sectoral correction factor (CSCF). However, Sandbag does not foresee the need for CSCF if tiering were introduced. It would take a massive upward swing of European industrial activity, lasting continuously for 15 years, to see any CSCF even without tiering. This is especially if the European Parliament and the Council can agree to limit free allocation by introducing a higher granularity on partial-cessation thresholds. This would significantly reduce the surplus caused by some sectors, most egregiously cement, leaving more room for steel.
Investment in new processes to radically reduce industrial emissions is needed. Indeed, such investment could make Europe a new low-carbon steel powerhouse, as the world proceeds to decarbonise under the agreement at COP21 in Paris. However, the costs that the EU carbon market is likely to apply to the steel sector in the near future are likely to be more modest than Ecofys suggests, and technologies exist to reduce steel emissions, including CCUS.
The ETS revision needs to be more ambitious, and the EU steel sector should support moves toward a future-proofed low-carbon economy.
Steel cladding image used under a creative commons licence, with thanks to Brian on Flickr.