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Sandbag’s new report reveals European climate laws are increasing emissions in the cement sector, whilst multinational cement companies reap huge financial windfalls. The cement sector must be the final Carbon Fatcat; real reform to the Emissions Trading Scheme (ETS) is urgent to tackle climate change.[1]

Perverse incentives in the design of the EU’s ‘flagship’ climate change policy, the Emissions Trading Scheme, have increased cement sector emissions. We estimate these rules have resulted in an extra 15 million tonnes of CO2. If the cement sector were outside the ETS, its emissions would be lower.  While the surpluses in emissions allowances that have accrued to most industrial sectors are now declining, in the cement sector the surplus continues to grow.

Five “Carbon Fatcat Companies” from the cement sector have collectively received nearly €1 billion worth of spare EU allowances (EUAs) for free between 2008 -2014.  As the number of free allowances available to all industry is fixed, over-allocation to cement companies reduces the allowances available to other sectors that might really need protection.

These facts highlight the urgent need to overhaul the rules governing the ETS in the ongoing reform of the Directive. A low emissions cement sector is possible, but to incentivise it requires that:

  • the ETS carbon price rises substantially (currently below €5/tonne).
  • the over-allocation of allowances is ended.
  • the ETS funds provide new support for innovative processes and Carbon Capture Utilisation & Storage.   

 

FatcatKey findings

Free allocation of ETS allowances exists to protect against potential ‘carbon leakage’.[2] However, the rules are creating perverse effects. In recent years, the ETS has inflated cement sector emissions through the import of emissions from other countries.  

Under the current rules producers lose 50% of their free carbon allocation if they produce less than 50% of their historic activity levels. In the case of the cement sector these perverse incentives are influencing the production of clinker – an intermediary material in the cement-making process, with a very high carbon intensity. Yearly production levels of clinker determine the number of allowances an installation receives for free.

We show through data-driven analysis that this has created perverse incentives for installations to over-produce clinker in order to avoid losing millions of euros worth of allowances.  This creates three undesirable outcomes:

  1.  The low efficiency producers are maintaining high output in order to receive free allowances. This in turn reduces the running time of higher efficiency producers, increasing overall CO2 emissions. In 2013 low-efficiency kilns continued to produce 20 million tonnes of clinker, despite nearly 50 million tonnes of unused capacity existing among high-efficiency kilns. Cement manufacturers seem to be spreading clinker production across as many installations as possible to gain maximum free allocation for each one of them, with the result that emissions increase.
  2. In some major producing countries cement is being made with an increasing proportion of clinker, which increases emissions.  In spite of the average clinker-to-cement ratio in Europe being 74% in 2013, the average has risen to 75% in Italy, and 80% in Spain.
  3. Surplus allocation subsidises clinker production to such a degree that between 2005 and 2013 Europe has turned from an importer to an exporter of clinker. Rather than causing emissions to leak and industry to move abroad the opposite has occurred –emissions have increased at home.  In 2012, the first year affected by these perverse incentives, European clinker exports stood at 6.4 million tonnes – nearly 4 times the level from 2011 – and a further increase to 7.8 million tonnes was recorded in 2013.

 

We crown the Cement Sector the new “ETS Fatcat”

surpluses for major industrial sectors until the end of Phase 3As of 2013, the burgeoning allowance surplus for cement now dwarfs the steel sector’s, the previous largest holder.  This over-allocation is not only increasing the ETS windfall for the cement sector, but is also fostering complacency about decarbonisation.

  • From 2008 to 2014, the cement sector received enough surplus allowances to cover 2.2 years of additional emissions without buying a single allowance.
  • Even though Phase 3 of the ETS introduced measures to rein in over-allocation, the cement sector’s surplus will continue to rise through to 2020, when it will be equivalent in volume to 2.5 years’ of full emissions (assuming activity stays at 2014 levels).
  • This expanding surplus is fed by allowances the sector receives as protection against potential ‘carbon leakage’.

We find no evidence that the ETS has directly contributed to decarbonisation in the cement sector

  • The use of cleaner fuels, like biomass, has increased.  But we show this is mainly due to national policies and the uptake of biomass remains very low in many countries.

 

We make proposals to urgently change the allocation rules, eliminate perverse incentives and avoid over-allocation. This means closing the loophole which allows installations to keep 100% of free allocation even if their production drops by 49%. It also means changing the carbon leakage rules from the current all-or-nothing system – to avoid disproportionate carbon leakage protection.

 

How can we cut cement sector emissions?

5 company surpluses

First, ensure a higher carbon price.  This helps not only quick wins, but encourages long-term investment, and makes many of the other recommendations suggested in the report cheaper.  These include more funding to finance deep-decarbonisation options, like Carbon Capture and Storage (CCS), through the Innovation Fund and other EU-level support channels, as well as Member States using ETS auction revenues.

 

Alex Luta, Campaigner & Policy Analyst at Sandbag, commented:

The EU ETS, far from decarbonising the cement sector, is actually leading to higher emissions. Substantial changes are urgently needed.  The best thing to do would be to have more ambitious climate targets and a higher carbon price. Policymakers should eliminate perverse incentives rewarding over-production with free allocation. Cement must no longer get more allowances than it needs relative to other sectors; instead, it should receive support for the development of deep-decarbonisation technologies.”

 

Notes

[1] The Final Carbon Fatcat: How Europe’s cement sector benefits and the climate suffers from emissions trading flaws (Sandbag, March 2015)

[2] ‘Carbon leakage’ is the term used to describe the potential that a carbon price in Europe will lead to industries moving to other countries where they don’t have to pay for their pollution. There is no evidence that carbon leakage is occurringor has occurred under the ETS, and no likelihood that it will occur in future with the EU carbon price currently below €5 per tonne.

[3] European Parliament event on Wednesday 16th March, 13.00. More details here.

Speaker details:

13:00 Welcome by Mr Peter Liese MEP, EPP

13:10 Alex Luta, Sandbag

13:25 Claude Loréa, CEMBUREAU

13:40 Donal O’Riain, Ecocem

13:55 Rob Van der Meer, HeidelbergCement

14:10 Panel Discussion and Q&A