Eurofer proposal for the implementation of Art. 10a. of Directive 2009/29/EC
Important note: The benchmarking system is under development. Therefore, this paper will be updated regularly.
EUROFER proposes a system for free allocation which relies primarily on benchmarks and is designed to maximise the carbon efficiency whilst minimising carbon leakage risk. This system
EUROFER proposes to apply benchmarking alternatives (grandfathering) for the allocation of free allowances to activities characterised by a wide range of products and processes but with a relatively small share of emissions.
Any benchmark system consists of four layers: The fundamental rules, the technical definition of the benchmarks, the identification of the benchmark values and the allocation methodology. The following description of the EUROFER system follows this systematic.
Fundamental rules
The Emissions Trading Directive 2009/29/EC provides directly and indirectly formulated general criteria for benchmarks. The ones most relevant for the steel industry stipulate that benchmarks must act against carbon leakage, must incentivise and promote reduction of GHG emissions, avoid undue competition distortion between on-site and outsourced installations, take into account unavoidable waste gas and be defined as Community-wide rules. The EUROFER benchmarking model is designed to comply with all these criteria.
Technical definition of the benchmarks
A description of each benchmark includes the following elements: Reference product, system boundaries, relevant carbon bearing flows, calculation scheme, rules for benchmark construction.
Identification of the benchmark values (= best performance identification)
Benchmarks must provide for CO2 reduction as well as against carbon leakage. A technologically feasible benchmark is of utmost importance ahead of the Copenhagen negotiations.
The identification of outliers should be performed by individual analysis of the data sets of the best ranked installations. Statistical evaluation is very sensible to the form of the distribution curve and should thus not be the methodology of first choice.
The individual outlier identification should be performed in two steps. First, installations which by the nature of their operation (especially their products) do not fit to the sample must be identified. Second, each best performer in the distribution curve must be evaluated against three criteria:
An installation not producing but using a waste gas shall become automatically an outlier in his respective benchmark (e.g. a heat treatment plant or a cement plant). This outlier rule is restricted by a de minimis clause.
In cases of a benchmark with a number of installations between 4 and 29 (inclusively) allow to build the benchmark values by referring to the 3 best performers.
Comparable installations covered by the same benchmark boundaries which operate on a single site shall be allowed to report data for the CO2-intensity distribution curve in combined form.
The identification of the best performer group should be made according to the number of installations covered by the benchmark and not by the number of installations actually submitting data to the CO2-intensity distribution curve.
In case of installations which are energy consumers (= they do not produce energy by-products) and which can shift their energy supply between electricity and primary fuels the ranking for best performer identification (= the construction of the distribution curve) should be made by combining CO2 from direct and indirect emissions.
EUROFER suggests to build benchmark-values on observed data (= by data collections) and make use of literature data only as a measure of last resort and that by doing so to consult the affected sector.
Allocation methodology for benchmarks
There are two alternatives for the reference production. Apply a rolling reference period or the use of 2005, 2006 and 2007 as reference years.
For the production reference, allow for corrections in case of long-period impairment of production, e.g. for long term maintenance stops (example is relining of blast furnaces). Options include the general possibility to remove one of the three reference years.
Allow for benchmarking alternatives for installations which are unique or highly diverse in characteristics and represent only a small share of a sector’s CO2 emissions as well as on the emissions of the manufacturing industries sector.
The alternative to benchmarking could be grandfathering without correction factor. Since grandfathering is applied only to small CO2 volumes the non-application of a correction factor increases simplicity without significantly impacting the CO2 market. Additionally, grandfathering is applied to non-comparable installations and this will not give rise to market distortions.
When calculating the caps, correct for the CO2 emissions from steel industry waste gases hidden in the validated emissions of the power sector of the years 2005 to 2007.
If the correction factor of Article 10a.5 of the Emissions Trading Directive 2009/29/EC needs to be applied, this factor could take into account aspects, which are relevant with respect to supporting the development towards a carbon lean economy but which are not addressed directly in the benchmarking system itself.
Allocation methodology for waste gas users
Installations not producing but using waste gas will be outliers because their situation is not generally applicable. These will be grandfathered on their non-waste gas related emissions only.
If there is a customer relation between waste gas user and waste gas producer the transfer of waste gases will have to be accompanied by some kind of coverage either
In the first case it must be legally secured that the waste gas producer is not obliged to submit all his allowances but only to the extent of his own allocation. In the case of the second solution there must be provisions against any legal risk that it would not be compatible with European law on the grounds that the emitting source is defined as the party to surrender certificates. The second solution would allow to design the whole allocation system with maximum simplicity and transparency. In both cases such provisions will have to be provided by contractual arrangements.