Proposed reform of Europe’s carbon market could impact jobs and investment in Scotland’s energy-intensive industries

Marshall Hall, energy policy manager at trade body Oil & Gas UK, told the Sunday Herald that, at a time when the industry and government is seeking to maximise recovery of the North Sea’s remaining oil and gas reserves “there is a risk, if you combine the effect of low oil prices and a substantial rise in the cost of allowances, that some fields may be so adversely effected by any changes [to the ETS] that they would not be sustainable economically”.

Hall warns that operators could decide to close down production from mature oil and gas fields in the North Sea earlier and that investment in new fields could be delayed or cancelled.

“Hitherto the ETS has not added huge costs to the offshore industry, but as the cost of compliance rises and fewer allowances are available this will change.

“We support carbon trading and the decarbonisation of the European economy but to have significant extra costs imposed is frankly not too helpful.”

The ETS is the world’s largest scheme for trading emissions allowances – covering more than 11,000 power stations and industrial plants in 31 countries – and a cornerstone of the EU’s fight against climate change.

But since being launched in 2005, the price of the permits has remained stubbornly low as a result of pollution credits being over allocated by several countries as well as the dampening impact of the financial crisis on growth.

The European Commission’s proposed remedy is to sharply reduce the number of free carbon emissions allowances granted to industries with the aim of pushing up the price of permits.

Announcing the reforms in July, EU energy and climate change commissioner Miguel Arias Cañete said that the ETS needs to be reformed in a way that encourages companies to reduce their emissions.

Although interim reforms have pushed prices on the ETS to around €7.5 per tonne of CO2 emissions up from a record low of less than €3 in 2013, industries fear that the current low cost of permits could spiral tenfold to €30 or more from 2020, when the fourth phase of the ETS gets underway and the proposed reforms kick in.

Conservative MEP Ian Duncan, who was last month appointed to co-ordinate the European Parliament’s response to the proposed ETS reforms, believes that the current low price of carbon permits makes the ETS almost useless as it does not encourage companies to “change their behaviour” sufficiently to make any difference.

“The ETS as it stands is broken and this may be our only chance to prove to Europe and the rest of the world that emissions trading systems can work,” Duncan said.

“We need to strike the right balance between protecting industry and jobs, and meeting our climate change obligations. I don’t think those goals are mutually exclusive, but I do know that the EU’s ETS as it stands is not delivering either.”

The 42-year-old former petroleum geologist’s first job will be to write a report on the Commission’s July proposal which will be debated in the European Parliament’s environment committee before negotiations open with the Commission and member states. Agreement is expected to take at least a year to reach.

Duncan said that his work on the dossier would get underway once November’s crunch UN Climate Change Conference in Paris has made a decision on possible new emissions targets. The conference aims to strike a legally binding deal to limit global warming to no more than two degrees above pre-industrial levels.

The European Union has already committed to cut greenhouse gas emissions to 40 per cent below 1990 levels by 2030.

The UK is in favour of a strong carbon price as the means to bring about the lowest cost transition to a less carbon-intensive economy and has introduced a top-up carbon tax (known as the Carbon Floor Price) of £18 per tonne on power generators to supplement the weak ETS.

The UK’s unilateral action to tackle the problem – which has led since 2013 to the UK having the highest wholesale electricity prices in Europe – has been criticised for skewing the playing field with other EU countries.

UK fossil fuel generators currently have to pay the UK levy in addition to the ETS levy, meaning that UK generators pay £23 per tonne while generators elsewhere in Europe pay just £5.30.

The controversial UK levy – which was intended by the previous coalition government to encourage utilities to switch to burning natural gas or generating power from renewables – has been blamed for leading to the closure next year of Scotland’s last remaining coal-fired power station at Longannet in Fife, the closure of other coal-fired stations south of the border as well as last month’s decision to close the UK’s last remaining steelworks at Redcar on Teeside.

Critics of UK energy policy also say that hopes that the levy would lead to the building of new gas-fired stations have not materialised, meanwhile the much-trumpeted and delayed new nuclear power station at Hinkley Point in Somerset is at best a decade away.

Energy-intensive industries around the UK are hoping that, if the proposed reforms to the EU ETS lead to higher prices for carbon permits, this will prompt the Chancellor of the Exchequer George Osborne to phase out or eliminate the supplementary UK levy.

But –as has been the case with the equally controversial Air Passenger Duty levy (which has led to the UK having the highest taxes on aviation in the world) – experience has shown that once governments become used to income streams from new taxes it is often hard to wean themselves off them.

With the Conservatives committed to eliminate the deficit by 2019/20 kissing goodbye to billions of pounds of tax revenue from power multinationals seems an unlikely move.

How the Emissions Trading System works

The EU’s Emissions Trading System works on the ‘cap-and-trade’ principle whereby a ‘cap’ or limit is set on the total amount of greenhouse gases that can be emitted.

Within the cap, companies receive or buy emission permits (around 16 billion tonnes-worth between 2013-20, roughly half the bloc’s total carbon emissions) which they can trade with one another as needed. Companies can also buy limited amounts of international credits from emission-saving projects around the world. The limit on the total number of allowances available ensures that they have a value.

The overall aim of the scheme is that, as the cap is reduced over time, so too do total emissions. After each year a company must surrender enough allowances to cover all its emissions, otherwise heavy fines are imposed.

One of the system’s shortcomings has been that when power generators cut emissions by investing in renewables they end up with more ETS emissions allowances than they need so they sell the excess to other users who can then emit more carbon than before which does nothing to reduce overall emissions.

It is estimated that by 2020, emissions from sectors covered by the ETS will be 21 per cent lower than in 2005. The European Commission recent proposals would see this rise to 43 per cent by 2030.

Bricks and the ETS

For James Raeburn, joint managing director of Raeburn Brick Ltd, Scotland’s last remaining brick maker, the fear is that the proposed reform of the ETS would hit his company with a “double whammy” of a progressive phase-out of the free carbon dioxide allowances that his company currently enjoys together with substantially higher prices for the emissions permits.

Raeburn also says that the ETS’s aim of encouraging energy-intensive industries to reduce their carbon emissions through fiscal incentives would have no effect on industries, such as brick making, where there are no available technologies for reducing emissions. Taxing companies which have done as much as they can to reduce emissions will not change their behaviour but will simply eat into their profitability.

£4 million turnover Raeburn Brick, which employs 30 people at its plant in south-east Glasgow, replaced its coal-burning kilns with lower emitting natural gas-fired kilns in 1985 and last year introduced more efficient burners but little can be done to reduce the company’s emissions further unless research into the possibility of using microwave technology is successful.

“There is the potential for job losses or closure but I don’t see that happening. In the worst case scenario this could lead to the price of our bricks having to rise by 3 per cent,” says Raeburn. “It would not be crippling but it would not be helpful either.”

Raeburn also points to the possibility that increased emissions taxes on brick makers in Europe would make the import from North African countries, which do not impose such levies, more competitive.