This week the European Commission (EC) announced its latest plan to change the emissions trading scheme (ETS). Meanwhile, in New Zealand, the government gave Fletcher Building around US$35m to keep its Golden Bay Cement Northland plant open. Read on to find out how the two stories are linked.
Following pressure from European heads of state earlier in the year, the EC published its proposal to amend the scheme. The commission has presented it as an Electrification Action Plan and an ETS review. However, the latter proposal is the main concern for the cement sector in the short term. It wants to add more free permits and slow the rate at which they are phased out. The Linear Reduction Factor (LRF) will be reduced to 3.7% for 2031 - 2035 and 1.7% for 2036 - 2040. This compares to the current LRF of 4.3% and the next one of 4.4% for 2028 - 2030. Both the amount of free permits or allowances for carbon credits and the rate at which they are phased out are a major concern for heavy emitting sectors, like cement, because it exposes them to the carbon price faster. The commission has spun this slowdown in its ambitions for the ETS as aligning it with the “domestic climate ambition level.”
Naturally, these changes come with strings attached. Free permits will be given to industry for longer but on the condition that investment is made towards decarbonisation. 80% of the value of the free permits will be given in advance but the remaining 20% will only follow once decarbonisation plans have been verified. Likewise, the free permit system will continue to operate to and the full version of the Cross Border Adjustment Mechanism (CBAM) will start from 2038, instead of 2034 previously.
Cement Europe welcomed the proposed changes, noting that they were an “acknowledgement of the need to maintain sufficient liquidity in the carbon market beyond 2040.” It also liked the inclusion of CO2 transport infrastructure within the definition of ETS ‘installation.’ However, it did not like the slower phase out of the free allowances for CBAM sectors, as it is seeking a “level playing field” for carbon costs for both imports and exports. It is also looking forward to any progress on electricity prices, noting that such prices in the European Union (EU) remained higher than those in many competing countries that produce cement and clinker.
Climate think tanks such as Sandbag were less enthusiastic. In response to the proposed changes it declared in a LinkedIn post that the reforms would torpedo the EU’s legally binding target of a net emissions reduction of 90% by 2040 from 1990 levels. Its view is that the ETS currently has a surplus of permits representing 1.7x the emissions reported in 2025. If the EU tries to meet an 85% target it runs the risk of having too many free permits and crashing the EU ETS price. Sandbag reckons, more realistically, that the most likely scenario, if the current proposals are enacted, is that the 1.7x surplus will endure to 2040 leading to a 75% reduction of total emissions. Or, in other words, the EU appears to be softening its emissions reduction targets.
All of this links to a cement plant in New Zealand because the owners, Fletcher Building, partly blamed the threat of closing the site on local carbon taxes. Following an ‘independent assessment’ the company said that it might have to close the integrated plant and import clinker instead by 2030. Instead, the government has made a “specific, one-time response to an exceptional set of circumstances” and local subsidiary Golden Bay Cement has committed to investing around US$87m and keeping the site open until at least 2040. As Fletcher Building pointed out in its accompanying press release, it supplies nearly 60% of the cement used in the country and 95% of the plant’s output is sold domestically. It is worth noting, that despite major differences between the two systems, the carbon price in New Zealand is currently around €50/t compared to around €80/t in the EU.
These kinds of situations are going to continue as carbon taxes grow and mature around the world. Schemes will be tweaked following political pressure and governments may have to decide whether they want to bail out heavy emitters that they might deem as essential to society. One absurdity of the current argument in the EU about the ETS is that the commission has now issued its response softening the system following a record-breaking heatwave.
