Standing before the European Parliament, raised above the grassy square at the heart of Place du Luxembourg, is a statue that few will have noted. Resplendent in regency dress, gazing wistfully toward the setting sun, stands John Cockerell, Lancastrian by birth, Belgian by adoption. Few will have heard of Cockerell which is a shame because by the time he shuffled off this mortal coil, he had all but single-handedly fuelled the Belgian industrial revolution building an industrial empire that embraced steel, iron and engineering and which survives in part to this day within ArcelorMittal.

Under the watchful gaze of the limestone Cockerel, the EU has grown from a Coal and Steel Community of six nations to an entity that holds in its hands the very future of the industries that Cockerell did so much to create. Today, over a fifth of Europe’s population works in manufacturing, some 30 million individuals (a fall of over 10% since the crash of 2008). Manufacturing generates €1.6 billion net annually. It also generates two billion tonnes of CO2 a year. And therein lies the rub.

The challenge facing industry

Industry has born the brunt of the EU’s efforts to temper climate change. Planes, trains and automobiles remain largely untouched, domestic efficiency measures still lack binding targets, farming (despite the pernicious reach of the CAP) is same old same old. Whilst manufacturing has reduced its carbon emissions by a fifth since 1990, the great leap forward in each and every other source of carbon still remains a distant prospect.

The cost of manufacturing in the EU is high. Electricity prices are up to 50% higher then the USA (where shale gas has driven down the cost of gas) or China (where coal is still king). Employment costs – all for reasons sound and sensible – can be over eight times higher than China. By almost all definitions, the EU is at a competitive disadvantage. Slightly unfortunate when the EU has determined that it will grow its manufacturing base by 20% by 2020 (and is currently remains 5% short of the promised land).

Achieving economic growth whilst cutting CO2 emissions is the Holy Grail of climate change. Of the EU’s member states, 17 can lay claim to this achievement. No mean feat, but it does present problems when EU law must pass through a European Council of 28 Member States, particularly when big players such as Poland are some way from decoupling.

Decoupling growth from carbon

All of which brings me to the EU’s Emissions Trading Scheme (ETS), the reform of which I am attempting to steer through the European Parliament. At its heart, the scheme is simple enough: for every tonne of CO2 industry wants to emit, it must secure an allowance. If it can innovate and reduce its emissions, it needs fewer allowances, thus decoupling growth from carbon. If the availability of allowances is decreased year on year, price of carbon should increase, further driving innovation.

All fine in theory. Indeed, in the beginning the scheme worked fine. A carbon price of €30 was a serious incentive to innovate. Then came the global financial crash. Industrial output tanked and a puddle of allowances grew into a lake. With time the lake has continued to grow, as various EU and national climate policies further reduced demand.

The problem was exacerbated by one particular element of the original scheme. Fearful of industrial flight – “carbon leakage” in the jargon – industries deemed most likely to up-sticks and flee to a region beyond the reach of the scheme were awarded free allowances. Inclusion on the carbon leakage list was like finding the golden ticket in Charlie And The Chocolate Factory. The lobbying that must have gone in to the original list could have powered the globe for a fortnight.

The unforeseen consequence of such a “comprehensive” list goes by the acronym CSCF – the Cross Sectoral Correction Factor. The CSCF applies because there is a fixed number of allowances available. When the number of free allowances awarded to industry outstrips the number of free allowances actually available, the Commission claws back allowances from every installation no matter how efficient or needful of protection to keep us within our budget of allowances. So a sector like steel, which is entitled to 100% free allowances, loses allowances as part of the clawback. Currently steel loses some 11% of its free allowances as a result of the CSCF. To make up this shortfall, the steel industry must pay for the remaining allowances.

Carbon leakage may well be academic at a carbon price of €6 per tonne, but the CSCF is very much alive and very much kicking.

Reform, you say?

I took up the rapporteurship on the ETS dossier with a simple aim: reduce carbon emissions. The Paris accord, unexpectedly, determined a far higher ambition than I thought possible. Good. Far from shucking this responsibility, I embraced it. How do you kick start the carbon market? How do you ensure that industries which cannot yet decouple from carbon receive the protection they need? How do you tell those in receipt of protection who don’t need it that you are taking it away?

I’m glad you asked. First, a tiered system to ensure that 100% means 100%; second, a bigger fund for innovation; third, an sharper focus on serious emitters vs. small and micro emitters; and finally, and most importantly, a triple lock on ambition – the only way we are going to get toward the targets agreed in Paris.

What about the workers?

A cross sectoral correction factor has been in place since 2013. By 2021 (when the reforms will kick in) the correction will remove 18% of allowances from all installations, stunting the protection of those sectors most at risk of flight, damaging competitiveness and reducing the incentive to innovate. When a CSCF applies, a plant must hand back some of the allowances it was previously allocated. Not only does this entail an administrative burden, it makes financial planning unpredictable and it costs money.

The only solution I could come up with to correct for the CSCF was the adoption of a tiered carbon leakage list. Sectors most at risk of carbon leakage will receive 100% of their allowances (and 100% means a 100%, because no CSCF will apply). Sectors less at risk of flight will receive commensurately fewer free allowances. Under my proposal there are four tiers: 100% for those most at risk of flight, 75% for those at high risk, 50% for those at medium and 30% for those at a low risk.

By reducing the availability of free allowance, industries will have to accelerate their levels of innovation, or accept they will pay a higher cost per tonne of carbon emitted.

Innovation is change that unlocks new value

Embracing new emission-reduction technology is the key to decoupling growth from carbon emissions. My reforms propose, for the first time, direct industry access to a dedicated innovation fund where before only member states could access such funding before – a fund to which I have advocated pumping in almost €4bn-worth of additional allowances. I have ensured that any technology which can reduce emissions – from renewables, through carbon capture and storage (CCS) to carbon capture and use (CCU) – has an equal chance of funding. I am determined to deliver the EU is at the cutting edge of climate mitigation technology.

Focus on the ‘big’ picture

Roughly 95% of all industrial emissions in the EU are expelled by just 5% of the installations covered by the scheme. That leaves great swathes of small emitters whose contribution to climate change is minimal by comparison. Right now, the ETS is poor at distinguishing between big emitters and small. A plant emitting 30,000 tonnes of CO2 must bear the same administrative burden and the same compliance costs as a coal fired power station emitting 30 million tonnes.

While these small plants may not emit much, they are significant employers and often whole communities are anchored by the goods they produce. This is why I have proposed excluding all installations that emit 50,000 tonnes of CO2 or less from the scheme. Instead of participating in the ETS, these plants will be able to opt in to tailored national emissions reduction schemes which are more efficient and more effective for smaller plants. Furthermore, I want to see every plant emitting under 5,000 tonnes of C02 removed entirely form the scheme because the ETS was never designed to encompass schools, hospitals or other miniscule emitters.

Triple lock on ambition

I propose three step change reforms – I term them locks: (i) a mechanism to allow member states to retire allowances that become surplus as a result of the success of national climate change measures; (ii) an annual audit of the relative success of the various overlapping EU climate change policies with a view to ensuring that where measures have reduced demand, surplus allowances are not allowed to build up and depress the carbon price; and finally (iii) ensure that the EU and its polices are in synergy ready for the 2023 UN global climate stocktake.

The ETS is but one of a number of EU rules that have changed the way EU industries consume energy and produce goods. The Industrial Emissions Directive (IED) ultimately did for cheap coal. The Energy Efficiency Directive and Renewables Directive have both seriously reduced carbon emissions (and in the by-going depressed the ETS carbon price).

Bringing the EU’s policies into harmony should facilitate a higher CO2 price. My proposal is to ensure that when an EU policy has been successful at reducing emissions, the number of allowances is reduced commensurately, in real time.

Furthermore, the EU is not alone in tackling climate change – member states have also instituted a range of policies to drive down emissions, form phasing out coal use to instituting various green taxes. The ETS as currently structured leaves no room for increased ambition at the member state level. I want this to change. I want a system which allows the members of the High Ambition Coalition to achieve their high ambitions, in the best way they see fit.

The journey of reform is just beginning. My report must pass through the Parliament’s Environment Committee and finally be judged in plenary. It will be changed, always I hope, for the better. That is the nature of the democratic process. Where change is sound and sensible I will champion it. Where it is daft or destructive I shall oppose it. Things will heat up before I can make a law to cool the whole planet.

 

Ian Duncan is an MEP and a member of the European Parliaments’s Environment, Public Health and Food Committee. He is the European Parliament rapporteur on the Emissions Trading Scheme, the EU’s flagship policy to tackle climate change.