VIK German Association of Industrial Energy Consumers welcomes the efforts of the European Commission on further development of ETS-Reform on the way to climate neutrality by 2050 and would like to provide feedback on the key issues which are important for energy-intensive industries.
Carbon-leakage protection and competitiveness
A successful industrial transition toward climate neutrality depends on establishing the specific framework conditions, especially planning reliability by setting up a political framework allowing for business cases to enable companies to invest in long-term, low carbon initiatives. These must include:
The transition and the expected investment in new capacity and emission reductions must be accompanied by enabling conditions creating a real business case across value chains. Free allocation of certificates contributes to create a business case for new installations. European emission reductions will only contribute to global reductions if carbon leakage is avoided. Investments in climate mitigation should not lead to the relocation of energy-intensive companies to third countries outside the EU.
Permission to use carbon credits under the Paris Agreement (Internationally Transferred Mitigation Outcomes (ITMO), Art. 6.2; Paris Agreement Crediting Mechanism (PACM), Art. 6.4) in the context of the planned review of the European Climate Law and EU Climate 2040 target
Contributions to minimising carbon dioxide outside Europe should be recognised within the EU-ETS. In this sense, the European Commission should open the EU climate law to the COP framework (ITMO and PACM-Mechanism) finalized in Baku at COP 29. There should be certain limits regarding the extent to which international credits can be used towards ETS obligations.
In this sense, it is important to introduce new options for reaching GHG-reductions on the way to the 2040 target in Europe: especially the use of international certificates should partly be allowed within the EU Climate Law, to have more flexibility for future ETS revisions. To avoid possible misuse, it is important to work on international standards for such certificates as a condition.
Opening up to ITMO and PACM-mechanisms enables a medium-term reduction in EU abatement costs: very costly measures only need to be implemented comprehensively once existing cost-effective potentials have been exhausted globally. The transition costs also fall in the long term, as the most expensive measures, such as the conversion of the raw material base, are linked to energy costs and can benefit from lower energy costs after the global conversion of energy systems if they are postponed . The aim of Article 6 of the Paris Agreement is to make mitigation measures globally tradable under strict conditions. Given the limited availability of financial resources, this will accelerate the industrial transformation.
Reform of Market Stability Reserve (MSR)
In the current discussion about the MSR, particularly noteworthy is the continuous cancellation of certificates that takes place within the MSR. These certificates are no longer available after their cancellation, which has significant implications for the market. It is important to address this issue with the perspective of the so-called "Endgame 2039". The MSR should be adjusted to address the current challenges and secure the transformation of the European industry. For the time being, a rapid adjustment of the MSR could help defuse carbon price fluctuations, which, in turn, would reduce the economic burden on the industry. It might be helpful to initially refrain from further tightening the MSR. This could provide flexibility to for at least temporary relief and give the companies the necessary time to adjust to the changes.
Affordable energy prices
The climate target aims to reduce final energy demand by more than 35%, with a strong emphasis on electrification . The energy intensive industry, especially in Germany, urgently needs a broad reduction in energy costs. In the past, traditionally higher costs for electricity and natural gas in Germany could be offset by other locational advantages. This is now only partially the case.
The global LNG price has become the decisive factor for Germany’s natural gas price. Industrial large-scale consumers face additional burdens due to levies on natural gas. Specifically, the gas storage levy (§ 35e EnWG) will increase gas prices in Germany by approximately 10% compared to EU competitors until 2027.
Electricity commodity prices are now much higher than in competitor regions such as China and the USA. This is primarily due to the high input costs for electricity and natural gas (procurement costs, additional direct cost components such as grid usage, levies, taxes, charges, etc., as well as indirectly associated costs, e.g., for the purchase of CO₂-certificates).
To make a continued existence of the energy-intensive industry in Germany and Europe possible all additional cost components added to the LNG and electricity prices must be eliminated for the industry so that it can purchase electricity at a price based on LNG. The impact of the ETS on electricity prices could be mitigated through a modified and expanded compensation system, which would include multiple industries and cover 100% of the ETS costs.
If expanding electricity price compensation is not feasible, an “industrial electricity price” must be introduced. However, regulatory cost add-ons (e.g., EUAs, gas surcharges, grid fees, electricity taxes) are creating a cost disadvantage for domestic industry.
Grid costs for the industry must be limited to a competitive level. The industry should not be held liable for the problems arising from the energy transition. Transformation-related grid costs should be financed from the federal budget. Simultaneously, the so-called “individual grid fees” according to §19 para. 2 StromNEV must retain their effect, even if this regulation is reformed towards greater flexibility requirements. Grit-cost-reliefs should be provided ex ante and not ex post to enable more competitive product pricing. For companies that cannot behave flexibly and may thus no longer qualify for individual grid fees, alternative relief options must be provided.
Electricity surcharges for the entire industry must be further reduced. The Special Equalization Scheme (BesAR) should be expanded, e.g., to include chemical parks. At the same time, the application process must be simplified to reduce bureaucracy. The industry should be exempt from the various surcharges arising from the energy crisis. Absorbing the costs of the gas storage levy would provide broad relief for both businesses and private households.
In the context of the current discussions on energy prices in the EU (including in the Draghi report), it is becoming clear that the focus is often not on competitiveness but rather on the affordability of energy for consumers. To achieve industrial transformation on the path to climate neutrality, energy-intensive companies require competitive market prices for hydrogen as well. Currently, price projections fluctuate between 6 and 10 € per kilogram green hydrogen in Germany. However, to compete effectively in the future, European companies need prices closer to the US IRA's projections of €2-3 per kilogram hydrogen. As other energy carriers develop in parallel (hydrogen, ammonia, synthetic fuels), a clear strategy is needed to optimise investment in infrastructure, striking the right balance between production and imports, while avoiding stranded costs.
Future risks connected with CBAM-implementation
For some players the CBAM lacks to deliver the same level of protection as free allocation under the ETS. High bureaucracy costs, lack of the export competitiveness protection or insufficient downstream protection, inadequate default values and high risks of fraud, are just some of the issues that need to be solved. Scope extension to other sectors should only happen once the CBAM proved to be effective and specific needs of those sectors can be addressed.
Provisions must also be established in the CBAM regulation to guarantee that EU producers remain competitive in the EU and non-EU markets, thereby maintaining the profitability of European production sites.
Compared to other developed economies where renewable energy is cheaper, the production prices of green products made in Europe, including net-zero technologies, will be higher. In this sense, we would like to point out the possible "cash-out effects" if CBAM revenues are not paid by importers at the European border. The higher end product prices paid by EU customers will mainly support non-EU producers. Also, when no transition has taken place, but the producing country introduces CO2-pricing, the EU has no control mechanisms to check how these revenues are used in third countries, whether it is for climate protection and decarbonisation or other purposes like support of their local industry.
Concerning the CBAM design, there are other aspects that should be reviewed in favour of the industry in the context of further ETS-reform. Currently, there are two issues: 1. Fair calculation of the CO2-price at the border: the Cross-Sectoral Correction Factor (CRCF) needs to be included in the formula. 2. Production facilities are obliged to purchase certificates in advance: within the Clean Industrial Deal package the share of certificates was reduced from 80% to 50%, and instead of default values, one can, if necessary, refer to lower validated values from the previous year provided by the supplier, and all mandatory certificates can be returned. Since the submission deadline has been extended until autumn and the suppliers are apparently not going to provide validated data any earlier, the “retention period” has thus been extended from a maximum of 13 to around 16–18 months. The advance payments are justified by the default risk of the importers, which is not very convincing, at least in the case of AEO-certified importers. If the changes are implemented, it will be better than before, but still not as good as if there were no advance payments at all.
Creating understandable and unbureaucratic climate policy instruments
In order to create an attractive, understandable and unbureaucratic system, it is necessary to focus on clear and simple solutions, rather than dwelling on specifics. It is observed that the European Commission repeatedly involves stakeholders in discussing the small details on ETS design as part of the public consultations, whereby the focus should be on an understandable and uncomplicated solutions that is acceptable for the industry. There is a danger of regularly getting bogged down in complex details, making discussions unnecessarily complicated. For example, companies often criticize the issue of reporting and new energy efficiency obligations (environmental offsets), which are not matched by the obligations for importers under a CBAM. However, some delegated regulations on ETS-Directive, such as those that define product benchmarks, are still important because they are often associated with additional financial expenses for certain industries.
CCUS and carbon removals: necessary infrastructure and recognition within the EU-ETS
CCUS technologies as well as CCUS infrastructure are important for transformation of energy-intensive industries, on the path to climate neutrality especially for sectors like concrete, steel or chemicals. To be successful, CCUS technologies should be recognised within the EU-ETS. In the long run, VIK acknowledges technologies of Carbon Direct Removal as a necessary tool to abate residual emissions from industries.
At this moment, the ETS does not set the right incentives to tap the circular potential of CCU for products. The climate contribution of CCU compared to conventional fossil feedstocks should be recognized for both short- and long-lived products. The relative benefit of using CCU is based on the avoidance of fossil raw material extraction, independent of the end-of life fate of the product.
In view of the indispensability of CCU for a climate-neutral world, Europe should remove regulatory barriers, like the input-based pricing of CO2 in the ETS by changing Article 12 (3b). Application of this Article according to the Draft Delegated Act will lead to double counting at least when waste incineration is included in the ETS. Generally, the proposed product scope within the Delegated Regulation as regards the requirements for considering that greenhouse gases have become permanently chemically bound, we define as too narrow.
Seniorreferentin für Klimapolitik & Koordinatorin für EU-Energie- und Klimapolitik.
