Climate Change: Eurofer Position on Sectoral Agreements and Sectoral Approaches - 30 July 2009

Sectoral agreements

A sectoral agreement is signed by governments and is legally binding by international law. It can serve as an element of an International Agreement providing special provisions for defined groups, or as an intermediary step or precursor to an International Agreement. However, a comprehensive International Agreement on Climate Change is the most suitable instrument to prevent leakage and to provide for equal treatment.

For any Sectoral agreement that may be envisaged the main objective must be the suppression of distortion of competition and the removal of leakage risk. Any sectoral agreement must be part of an International Agreement that includes all other ETS sectors.

The concept of common but differentiated responsibilities can be applied to countries but not to globally tradable goods. Tradable goods must be subject to the same discipline, because otherwise trade flows will adjust according to least cost opportunities and no CO2 reduction effect be obtained. Any sectoral agreement must therefore comply with certain stringent criteria to provide against leakage:

• equal treatment of the participating companies,
• common quantitative targets expressed as emission per reference product; quantitative targets can have different values for Least Developed Countries only or for countries whose producers do not significantly influence global prices. This differentiation should be a starting point with convergence over time,
• a common cap (or its absence for all participants – systems can be developed which would achieve real global emission reduction without a cap); it must be kept in mind that the existence of regionally differentiated caps will unavoidably lead to leakage even if all producers of a sector must comply with the same CO2-intensities per product; the reason is that additional CO2 from additional production will not be capped but will migrate to the non-capped regions,
• equal financial obligations (e.g. auctioning elements versus free allocations)
• coverage of a critical mass of global production, for steel at least 85% of global production, covered by the US, the EU, Japan, South-Korea, Russia, China, India, Brazil, Ukraine and fast growing countries like Iran,
• materials in competition have to be subject to equivalent restrictions taking into account life cycle aspects,
• respective data must be based on a harmonised GHG assessment methodology, which provides for comparability, preferably in the form of an ISO or/and CEN standard.
• an effective international monitoring and verification system (Art. 10b1 ETS directive),
• a binding dispute settlement regime and clear sanctioning rules (Art. 10b1 ETS dir.).

The above criteria are, inter alia, implied by Art. 10a18 ETS directive, requiring (for the determination of carbon leakage sectors) to take account of the extent to which third countries, representing a decisive share of global production of products in sectors or subsectors deemed to be at risk of carbon leakage, firmly commit to rescuing greenhouse gas emissions in the relevant sectors or subsectors to an extent comparable to that of the Community and within the same time-frame.

To integrate different existing political approaches, baselines will be the best choice for quantitative targets. Targets, which adequately cover direct, indirect and upstream emissions - quantified by a globally harmonised CO2 assessment methodology which provides for full comparability - offer the best option to connect both to the direct CO2-system of the EU and the energy based approach of Japan and Korea and China.

Finally, any sectoral agreement must be accompanied with an evaluation on its impacts on leakage risk and equal competition. A respective mandate should be part of framework stipulations for sectoral agreements which should be part of the Post-Kyoto International Agreement.

If a comprehensive solution is not achievable the EU must upkeep and if needed expand measures against leakage risk. The main instrument must be free allocation based on performance. Complementary only, WTO compatible forms of border measures should be investigated and developed to be available as one possible form of additional measures.

Sectoral approaches

Clearly distinct from a sectoral agreement is a sectoral approach, which is an instrument to increase voluntary engagement of companies of a sector around the globe. It is a dynamic process starting with very loose arrangements and patchy participation converging over time towards ever increased coverage and common rules and targets.

A sectoral approach is therefore not a suitable blueprint for a sectoral agreement because it lacks by its nature (it is a process, not a signed, binding document) the possibility to introduce equal competition and provide against leakage risk on a global scale. A sectoral approach can inform national and international policies but it cannot substitute them. It can produce information, instruments and tools which may provide certain input into a sectoral or international agreement.

However, simple copy-pasting is not possible. The instruments and tools developed under a sectoral approach must be modified and fine-tuned for their application under a sectoral or international agreement. Examples are GHG quantification, technology roadmaps or know-how exchange platforms.

To clarify its role, potentials and limitations communication on a sectoral approach must contain a clarification on

• its contribution to a sectoral or international agreement
• the extent to which the sectoral approach and/or its current status of development provides against leakage and for equal competition,
• the extent to which elements of the approach must be modified for use under a sectoral or international agreement (especially any GHG assessment method used).

Parties to an International Agreement should provide financial, administrative, legal and logistical support for activities made in the framework of a sectoral approach.