The EU emissions trading system (ETS) is failing to shield industry from carbon leakage, and the EU should introduce carbon border measures to help European firms compete internationally, some of Germany's largest industrial companies have said.
Calls for an EU-wide carbon border tax have increased in recent months, after European commission president-elect Ursula von der Leyen pledged to introduce legislation proposing the idea in her first 100 days of office. She begins her five-year term in November.
A carbon border tax would impose a levy on imports into the EU from non-EU countries, so that the imported product is subject to CO2 costs comparable with if it had been made in Europe, where its emissions would have been covered by the EU ETS.
The price of an EU ETS permit, which allows a company to emit one tonne of CO2, has more than tripled since the start of 2018. The EU gives free ETS allowances to industry to attempt to avoid carbon leakage, which occurs when firms relocate to non-EU regions to avoid paying ETS costs.
But this system is not working, according to industrial firms.
"If you want to keep industry in Europe, additional carbon leakage measures have to be implemented. That could be a carbon border adjustment," HeidelbergCement's EU public affairs director Rob van der Meer said.
EU cement-makers say they are struggling to compete with firms in countries such as Turkey and Egypt, which have lower production costs, partly because they do not face the EU's CO2 costs. It is also relatively cheap to ship cement and clinker to Europe from countries further afield, such as China, which accounts for more than half of the world's cement production.
These challenges will become more acute from 2021, when the EU will tighten the amount of free permits it gives to industry.
"This will become even more evident in phase four of the EU ETS [2021-30], when the free allocation changes," HeidelbergCement Berlin liaison office head Christoph Reissfelder said.
German chemicals firm BASF also called for carbon border measures to help EU firms stay competitive.
"We need a competitive CO2 price globally, but until then we need compensation on the border, otherwise our products will be so expensive that we will not be able to sell them on the global market," BASF head of energy and climate policy Claus Beckmann said.
One way to implement border measures would be to define carbon benchmarks for product groups, and apply these to all imports, regardless of which country the product comes from. Applying the tax to products, rather than specific countries, could help ensure it complies with World Trade Organisation rules, Beckmann said.
‘Second best'
German industry associations also back EU carbon border measures, but said an international ETS would be a more efficient way to support decarbonisation in their sectors.
Higher EU ETS costs are "really reducing our international competitiveness in a very difficult international environment", German steel association Wirtschaftsvereinigung Stahl executive director Martin Theuringer said, pointing to challenges including global steel overcapacity, market dumping and risks arising from the US-China trade war.
The EU can tackle carbon leakage by giving industry more free ETS permits, or by compensating firms for their electricity costs if higher carbon prices cause power prices to rise, he said.
"But if all this fails, then of course we have to think about developing new instruments to integrate other countries' supplies into our carbon pricing system, and that is basically a border adjustment," he said.
EU carbon border measures are likely to become necessary, according to German industry, mining and chemical trade union IG BCE's head of energy and economic policy, Ralf Bartels. But they "will always be second best to an international emissions trading system", he added.
A carbon border tax is not without risks. One concern is the threat of retaliatory measures from other countries, according to Heiko Reese, head of metal workers' union IG Metall's office in Dusseldorf.
And a product-based tax could be hard to implement in the chemicals sector, as calculating and applying a carbon duty to thousands of different products would be a practical challenge, the German chemical industry association's head of energy and climate, Jorg Rothermel, said.
Industrial emissions
Europe's heavy industry will face increasing pressure to cut its emissions in the coming years — especially if the EU sets an economy-wide target to reach net zero emissions by 2050, which would probably require all sectors to cut emissions by at least 95pc.
Emissions from EU industry have barely fallen since 2013, while the EU power sector has cut its emissions by 17pc over the same period.
Some industrial sectors have performed better than others. ETS emissions from steel production were 122.2mn t CO2 equivalent (CO2e) last year, down by 7pc compared with 2013. But emissions from cement production increased by 7pc over the same period to 121.3mn t CO2e in 2018 (see chart).
Environmental groups say that the EU's decision to give industry free allowances has reduced the incentive for these sectors to cut CO2 emissions. The cement sector received roughly 64mn more free permits in 2013-18 than its EU ETS emissions over the period — although this accounts only for emissions from cement production, and not from the sector's fuel combustion to generate power.
There are also technological challenges to reducing emissions in industry, with no quick fix to decarbonising some CO2-intensive industrial processes, while the power sector can make large CO2 savings by switching from coal to gas-fired power generation.
Many of the technologies that industrial sectors are betting on — such as using hydrogen instead of coal to produce low-carbon steel — have not yet reached commercial scale. These technologies require large investments in order to reach commercialisation, and could increase the cost of steel production by 20-30pc. EU steel firms say they need public funding to help them bear these costs and remain competitive.
