Platts Emissions Daily: free carbon allowances will not prevent carbon leakage

 Mayumi Watanabe

London — Issuing free CO2 emission allowances to steel, aluminum and other industries may not prevent companies relocating operations away from Europe to regions with less environmental restrictions, so-called “carbon leakage,” UK-based research group Climate Strategies said Monday ahead of the European Parliament meeting this week on leakage risk studies.

The EU is currently studying the possibility of issuing more free EU Allowances to 164 industrial sectors including steel, aluminum, and ferroalloy production plants after 2013, the European Commission said late September. Industrial and power sectors are mostly being allocated free EUAs until 2012, but from 2013 some sectors will have to pay for 20% of their allowances, rising each year to 60% in 2020. In a report published Monday entitled “Tackling Leakage in a World of Unequal Carbon Prices,” Climate Strategies argued that carbon leakage cannot be addressed by one single approach.

“It is clear that the potential that emissions shift to outside the European Union territory hinges on the behavior of sectors, and their ability to pass on carbon costs,” the report said.

The Commission should assess the cost implications and investment needs for all business sectors and consider applying tailored solutions such as border taxes and subsidies before allocating them free carbon allowances after 2013, Climate Strategies said.

“Steel, aluminum and cement... differ significantly in their exposure. Ignoring the different sectoral characteristics when implementing remedies against carbon leakage will not tackle carbon leakage,” the report said.

Approximately 2 metric tons of CO2 are emitted per 1 mt of crude steel production, according to Nippon Steel, while 1 mt of primary aluminum production emits 1.6 mt CO2 equivalent of perfluorocarbon compounds, a greenhouse gas, according to the International Aluminum Institute. The proposal for extending free allowances has to be approved formally by the European Parliament and the 27 EU national governments, acting in the EU Council, in the next three months. The EC said it hopes to be able to adopt the list

formally by the end of the year.

In the January-August 2009 period, EU steel plants accounted for roughly 11% of world steel production, down from 15% in the same period last year, according to the World Steel Association. The EU member states and Russia accounted for 33% of the global aluminum production in January-August 2009, down slightly from 36% in 2008. —