Industry warms to 'dynamic' free allowances fund

German chemicals firm BASF's proposal for a new system of free allowances distribution from a "dynamic industry fund" is gaining some traction among industrial firms.

Chemical industry associations the European Chemical Industry Council (Cefic) and Germany's VCI appear to be mulling the proposal carefully, as well as a number of other chemicals firms with operations in Europe.

Current discussions with the European Commission on the proposal will form part of the carbon leakage consultation. If the BASF recommendation gains approval from member states and members of European Parliament (MEPs) it would likely be included in a tabled legislative proposal on a market stability reserve for the EU emissions trading scheme (ETS), on which debate will begin in September.

This is because the idea proposes the development of a fund for free EU ETS allowances populated by back-loaded permits, which some member states have suggested should go into a market stability reserve rather than re-introducing them into the market over the course of 2019-20.

The free allowances for industry would then be released from the dynamic industry fund to cover sector emissions on a rolling annual basis, rather than the current system which is based on historical greenhouse gas (GHG) emissions. This means that installations would return allowances to the fund if they emit less GHGs than forecast.

This rolling, or dynamic, system of free EU ETS allocation remains a sticking point for the commission, which is concerned about confidentiality and quality issues surrounding the collection of data from industrials.

"But the feeling now is that the commission is accepting that production-based allocation has its advantages," BASF energy and climate policy senior manager Brigitta Huckestein said.

A document outlining the BASF model seen by Argus also proposes a slow reduction of the thresholds of the market stability reserve in line with the linear reduction factor of the total cap.

A second, similar, dynamic industry fund proposal is simultaneously being pushed to the commission by some Dutch industrials. That model, outlined by consultancy Ecofys, differs principally from the BASF model in its treatment of indirect emissions — which are produced by the energy consumed by an industrial rather than those produced by the manufacturing process.

The Ecofys model proposes the inclusion of indirect emissions through the fund, while the BASF model does not.

European commissioner Jos Delbeke today said he continues to be concerned over the dynamic allocation proposal.

"We have 28 EU member states, so getting good comparable data [on GHG emissions] is challenging," he said.

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