Cementing the argument for querying ETS loophole
On Monday I got a call from someone connected with the cement sector who was none too pleased with our report detailing the views of Ecocem founder and chief executive, Donal O’Riain.
For those that missed it, O’Riain was calling for a super-tax on profits made by Irish cement producers from their receipt of excess allowances under the EU’s anti-carbon Emissions Trading Scheme (ETS). (The allowances are assets that can be sold in the marketplace.)
From a lobbying point of view, the problem with the call was that while the views in the article were obviously unwelcome, the caller was not in a position to contradict O’Riain’s central claim.
Being a conscientious and perennially worried reporter, however, I made efforts to probe O’Riain’s view. The picture that emerged was of yet another industry trying to deal with the aftermath of the Celtic Tiger, this time with a walk-on part for the Kyoto climate change protocol.
Back in the mid-noughties, when the Department of the Environment was involved with agreeing thresholds and allowances under the ETS, the worry, nay fear, was that the scheme was going to create enormous costs for Ireland. Emissions were going through the roof, and the exchequer was going to pay dearly.
Allowances were assigned to a number of our biggest carbon emitting enterprises on the basis of their then levels of production, and projected increases. The idea was to create financial incentives to encourage firms to reduce the emissions associated with their production levels.
At the time Irish cement production was a multiple of the European per capita average, a fact O’Riain says he brought to the attention of the Environmental Protection Agency in 2004.
Cement production capacity hugely increased during the bubble years, with Irish Cement, Quinn Cement, and Lagan Cement all building substantial new production units. Peak production came in 2007, when the sector produced more than 5 million tonnes of cement. Production these days is approximately 1.5 million tonnes, O’Riain says. In other words, the sector has huge excess capacity.
Mixing it up
The recession has turned the logic of the emissions scheme on its head. In many instances the allowances available are greater than the businesses that receive them need, given their reduced production.
Also, the fall in the price of the allowances in the marketplace has meant the financial incentive has been greatly weakened. (Businesses that exceed their emissions thresholds have to buy a compensating amount of allowances. Allowances that used to cost more than €20 per tonne of CO2 now cost a quarter of that.)
Obviously the Irish cement sector, given its €300 million-plus investment in plant over the past decade, and its grim prospects for demand in the near to medium term, is grateful for any surplus carbon allowances it might be receiving. But there is no denying that the objective of the ETS has nothing to do with giving succour to a high emissions sector that created too much capacity during an unsustainable housing boom.
The European Commission has invested a lot of reputational capital into its emissions scheme and will want to restore it to health some time soon. A key issue in that regard will be to up the price of the allowances in the marketplace, so as to increase the cost of pollution, and the associated incentive for emission reduction.
The sector has successfully convinced the commission that it must be careful not to punish community cement producers to the benefit of producers located along the union’s eastern borders, or across the Straits of Gibraltar. The Irish cement sector is a rather isolated one, surrounded by water as the old ballad has it, but it will nevertheless benefit from the commission’s need to ensure its emission reduction efforts don’t punish EU producers while having no net benefit for the globe.
How demand, an increased market price for allowances, and commission changes to the ETS will play out in the coming year or two are huge issues for an important domestic manufacturing sector providing valuable employment.
The sector resents O’Riain’s claim that the surplus carbon allowances it is receiving are at the public’s expense. Certainly the State isn’t buying them and passing them on. However it is passing on an asset, for free, to private companies in circumstances where the transaction does not now involve a public good and the State itself could get value for the asset.
O’Riain says the traditional sector wants to hold on to its old production methods because of the high profit margins involved.
That’s a point I didn’t get to run past anyone from the traditional sector yesterday evening. But I’m sure I’ll get a call some time today.