This week Donal O'Riain, the Irish chief executive of Ecocem, cried out for an 80% tax on cement producers in Ireland. His reason? In his words, Irish producers are making profits from an over-allocation in the European Union (EU) Emissions Trading Scheme (ETS) despite demand dropping in the Irish industry. The tax was his suggestion to address this 'anomaly' and give the Irish Exchequer a boost.
The timing of his comments are interesting given that the EU ETS entered its third phase at the start of 2013. Towards the end of 2012 environmental campaign group Sandbag questioned in a report whether the scheme was actually helping the environment or not. As Sandbag pointed out generally, not just for the cement industry, carbon prices in the scheme had remained low due to an excess supply in the market. Due to the oversupply, prices were so low that the EU ETS has ceased to function.
The European Commission conceded this failing of the EU ETS in November 2012 by announcing that it was taking steps to address the supply-demand imbalance of emission allowances in the scheme. Firstly 'back-loading' action volumes, revising the auction time profile and delay of the auctioning of 900 million allowances, came into effect from 1 January 2013. Secondly the Commission launched a debate on broad structural measures with a report on the carbon market.
Any emissions trading scheme can distort the market in unexpected ways. With regards to the cement industry, if O'Riain is correct, then parts of the Irish cement industry are making profit on carbon credits despite demand falling. Or, to put it as O'Riain did, the EU ETS may be subsidising environmentally-unfriendly plants at the expensive of more environmentally sensitive ones. Such as Ecocem we must presume. What would be really interesting here is to find out whether other European cement producing countries are also benefitting from over-allocation as demand falls, specifically in Portugal, Spain, Italy and Greece.
Another distortion is that in the EU ETS, offsets generated from developing countries can be surrendered by companies in competing sectors in the EU, giving, in effect, a subsidy to competitors outside the EU. For example, as ETS schemes spread then staying outside of such regulation could prove profitable for cement exporters.
Koen Coppenholle the chief executive of CEMBUREAU, the European Cement Association, tackled this in his response to the European Commission's report, "It is essential that any further reduction of CO2 emissions above the targets agreed should remain conditional upon the conclusion of an international agreement between all major greenhouse gas emitting countries. This should be undertaken with a view to establish a global crediting scheme, characterised by a comparable methodology to measure greenhouse gas emission reductions and equivalent monitoring and reduction efforts." Hence the interest in regional Chinese ETS schemes such as the emissions trading schemes that were launched in Beijing, Shanghai and Guangdong in 2012. China currently plans to introduce its own national scheme in 2015.
Despite the bureaucrats' efforts to improve emissions trading schemes, Petroleum Review summed up their effect in June 2012, "Carbon trading appears to have pulled off the noteworthy achievement of uniting oil and gas producers and environmentalists in their appraisal of its shortcomings." We could add cement producers to that list.