Impact of CO2 emission certificates on the chemical industry. Tim Evison, VP Group Business Development, Messer Group

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1 Impact of CO2 emission certificates on the chemical industry Tim Evison, VP Group Business Development, Messer Group

2 Emissions trading is one tool in a battery of EU legislation Number of pieces of legislation * on environment and safety issued by the European Union ( ) * Directives, Decisions and Regulations 1953 Source: Federchimica % Hazardous Substances (49,8) Safety (17,0) Waste (14,4) Air Pollution (13,7) Water Pollution (5,1)

3 Chemical sector is central to energy/environmental policy The chemical industry accounts for around 14% of GHG emissions from industrial processes in the EU and is the largest electricity-consuming manufacturing sector (CEFIC)

4 Climate and Energy Package (CEP), 2009 The climate and energy package is a set of binding legislation which aims to ensure the European Union meets its ambitious climate and energy targets for These targets, known as the " " targets, set three key objectives for 2020: A 20% reduction in EU greenhouse gas emissions from 1990 levels; Raising the share of EU energy consumption produced from renewable resources to 20%; A 20% improvement in the EU's energy efficiency. The targets were set by EU leaders in March 2007, when they committed Europe to become a highly energy-efficient, low carbon economy, and were enacted through the climate and energy package in 2009

5 Emissions Trading: a flagship of EU environmental policy (Croatia, Iceland, Liechtens., and Norway) Goal: 21% reduction in the emissions of participating sectors by 2020 from a 2005 baseline

6 Emissions Trading: a key tool to achieve CEP goals Source: EEA, Supply of emission certificates in the ETS is pre-set to decline by 1,74%pa so emissions reductions across trading sectors are certain To achieve the goals of the Climate and Energy Package non-trading sectors must also reduce their emissions by approximately 10 % vs. 2005, requiring other policy tools: ETD, subsidies, targets,..

7 Emissions Trading: participating sectors ETS Trading Periods or phases Phase 2 ( ): electricity production, steel, refining and large combustion installations Phase 3 ( ): many chemicals activities now fall within scope: Now ~50% of verified ETS emissions in total EU GHG!

8 Emissions Trading: basic principles EUA: financial instrument created by EU & sold at auction 1 EUA must be surrendered for each direct tonne of CO2 emitted Purchase cost is mitigated by partial allocation of free EUAs In Phase 3, vulnerable sectors exposed to carbon leakage receive 100% of benchmark free allocation based on average of top 10% Less exposed sectors receive 80% in 2013, falling to 30% in 2020 Emissions: Net emissions (in CO2e) of installation registered under ETS CO2e transferred out (to storage) Buy EUAs Receive free EUAs EUAs: Sell EUAs Surrender # EUAs to government

9 Over 80% of CO2e arise from energy consumption Total greenhouse gas emissions by sector (%) in EU-27, 2009 Source: EEA, November,

10 Emissions Trading: Consequences Consumption of fossil fuels is made more expensive Energy efficiency is even more important An incentive exists to transfer CO2 out of ETS installations Permanent storage Re-use? Free allocation of a financial asset carries risks for competition Electricity generated from fossil fuels is made more expensive No free allocation of EUAs to electricity generation (with limited exceptions) ETS Directive gives Member States the option to provide state aid to vulnerable electro-intensive industries, subject to DG Comp guidelines Disparity in treatment between electrical and primary energy Energy efficiency is even more important

11 The chemical sector is amongst the most affected Source: Climate Strategies Report, 2008

12 Competitiveness of EU basic chemicals may be lessened

13 In chemicals sector process emissions are >50% of total Source: Ecofys,

14 Backup Source: Greenhouse Gas (GHG) Emissions by Sector, EEA July

15 CO2 Collection costs from process emissions are lower Source: CRUST, 8/2002.

16 e.g. Netherlands Source: CRUST, 8/2002.

17 CO2e emissions in the chemical industry have fallen..

18 .. whilst the sector has grown substantially

19 The ETS was indeed having a noticeable effect pre-crisis (LULUCF = land use, land-use change and forestry) Source: Annual European Union greenhouse gas inventory and inventory report 2012, EU Submission to UNFCCC

20 But today, the ETS is in some structural difficulty Economic crisis has suppressed demand whilst EUA supply is fixed Exemptions for energy-intensive industries subject to carbon leakage have been attacked as having been too generous In 2013 only just over 50% of the 2.1bn tonnes of EUA will be auctioned Emissions credits generated from the worldwide implementation of cleantech projects agreed to under Kyoto are dumped in the EU

21 Running repairs are required and surely forthcoming Lowering the cap alone will reduce, but not eliminate, the allowance surplus So: Backloading? National actions? carbon tax UK CCL Source: CEN, Carbon-Emissions-Trading-Scheme.html

22 Impact of CO2e costs on the chemical industry: Indirect CO2e (electricity use) Energy CO2e Process CO2e Energy efficiency Increased recycling Use of renewables /biomass CCS CCU Lifecycle thinking Energy efficiency is critical to the competitiveness of the EU chemical sector Recycled products (e.g. plastics?) are a source of energy and hydrocarbons for chemical processes Biomass is a source of CO2-free energy and a renewable source of hydrocarbons for chemical processes Capturing and storing CO2 is least costly from concentrated point sources in chemical processes. EU support from NER300. Captured CO2 can be a resource including as a chemical feedstock. Need energy from renewable energy sources, new catalysts,.. The global chemical sector currently delivers 2 tonnes of GHG savings for every tonne emitted in the production processes (CEFIC)

23 LCA thinking:

24 ETS costs lead to EU resources to support low-c projects Price S2 (with ETS costs) S1 Surplus available to support low carbon projects Lost competitiveness amongst efficiency laggards D1 Quantity

25 Efficiency, innovation and LCA-thinking permit growth Price Q1 (ETS costs absorbed by efficiency gains) D2 Demand increased through recgnition of (and support for) LCA value-added D1 Quantity

26 Roland Berger, Chemicals 2030 Sustainability will become as much a part of corporate DNA as health, safety, environment and quality (HSEQ) are today. Almost all segments will be affected by new regulations that may lead to higher production costs. Commodity plastics will (among other things) see higher recycling rates and the rise of bio-plastics plastics. Engineered plastics will increasingly replace materials like glass and steel in enduser industries like automotive, where lower weights cut emissions and increase mileage. Advances in process intensification will enable more effective and efficient production. Breakthroughs may enable companies to remain competitive in mature regions and give technology leaders an edge over rivals with better ter customer access. Process intensification will have most impact in specialty segments and be an important enabler of the bio-based economy. New production routes that substitute oil and gas with biomass as feedstock are on the verge of breaking through, but their impact on plastics and specialty segments remains uncertain. The impact of value chain optimization is more readily assessed. In inorganics and engineered plastics, for instance, it will lead to a paradigm shift towards more decentralized production. Finally, logistics costs and physical constraints (e.g. ship and port capacity) are exceedingly volatile even if we correct for crude prices, which until recently were the only (dominant) source of volatility.

27 Conclusions: Work, work work to improve energy (and process) efficiency to assure continued European competitiveness reduced direct and indirect emissions reduced impact of volatility Take advantage of EU funds generated from ETS for re-investment in low-carbon projects for future competitive advantage Recycling Renewables CCS CCU Use LCA thinking to develop government and customer support for markets in which chemical products deliver environmental benefits Insulation Others