Emissions trading: a concrete contribution: a continentwide emissions trading program has begun in Europe

Concrete Producer, The, Feb, 2005 by Peter Ion

With major concessions from the World Trade Organization achieved, Russia has breathed new life into the Kyoto Protocol. Limitations on global greenhouse gas emissions are now due to come into full force for the first commitment period starting in 2008. The concrete and cement industries there are watching carefully.

In line with this, the word's first continentwide emissions trading program began across the European Union (EU) in January of this year. The EU Emissions Trading Scheme follows the success of the UK Scheme, which marks its third anniversary in April. For the first time, direct participants were invited to bid into an inaugural online auction of allocated units of emission. Targeted specifically to control C[O.sub.2] emissions, the major concrete and cement producers have been directly involved.

The 'descending clock' auction process in which United Kingdom companies participated resulted in a valuation of GBP 53.37 (US $103) for a tonne of C[O.sub.2]. Adjustments for the requirements for incrementally increasing emissions reductions and corporate taxes resulted in a final value closer to $16.50 per ton in real terms--a figure closer to trading prices quoted on fledgling exchanges and carbon markets with which the United States has become familiar.

Trading activity over the three years has generated a market price between $3.85 and $23.15, with trading volumes typically concentrated around the financial reporting dates in the spring.

Through a burden-sharing agreement in which the 15 EU countries jointly committed to a continentwide Kyoto objective (recently adjusted to accommodate the expansion to 25 Member-States), the EU is not on schedule relative to its stated target of an overall 8% reduction relative to 1990 levels.

While some countries are ahead of their own national curve (the UK by 5.2%, Germany by 6.8%) others are not pulling their weight. Ireland, Spain, and Portugal are the worst offenders with emissions outputs 23.9%, 23.8%, and 21.6% below target, respectively.

Based on a "cap and trade" system in which countries have been assigned national allocations, trans-border transfers of units will provide the opportunity for Member States to meet their targets through purchasing and banking of units as the need arises. Safeguards and measures to control market manipulation and artificial pricing are in place, neither of which has been experienced in the UK Scheme. The overall balance of activity is expected to account for a little under 5% of the EU's overall targeted greenhouse gas reductions within the Kyoto Protocol.

One company's participation

In the UK auction, Lafarge allocated 3.53 million tons of allowable C[O.sub.2], emissions, accounting for 11.4% of the overall allocation. Ranked fourth by volume behind BE Shell UK, and UK Coal Mining Ltd., Lafarge's transactions were limited to the initial bulk allocation and subsequent retirement of their units with no interorganization trading. (Shell UK undertook 145 separate trades as a buyer or seller during the second year of the Scheme.)

In terms of the actual target reductions achieved over the first two years, Lafarge/Blue Circle ranked third with an 8.71% change in emissions levels (Invista Dupont achieved a staggering 56.8% reduction over the same time frame.) All 22 direct participants collectively achieved marginally under 20% overall reductions.

Member States have been able to negotiate with the European Commission for specific exemptions in support of existing agreements that individual companies have struck with their respective governments.

But it is anticipated that the concrete and cement production sector will be active in the EU Scheme. Assuming that the same level of participation and allowance provision are extended to the trans-European (EU-25) concrete and related products production sector as was seen within the UK Scheme, the target levels of C[O.sub.2], reduction are anticipated to be between 27.5 and 33 megatons.

In 2003, the EU-15 cement industry collectively produced 214.5 million tons of final product, or 10.3% of world output. This accounted for 112 million tons of C[O.sub.2]. Applying an 8% target reduction, the sector is charged with reducing C[O.sub.2], output by 8.98 megatons annually, increasing incrementally as the Scheme takes effect.

If projected valuations are accurate, this would produce an approximate figure of GBP 325,000, or $490,000, for the allocations to the sector as a whole, 5% of which may be auctioned off through normal bidding processes between 2005 and 2007. This increases to a 10% auction allowance between 2008-12.

The EU Scheme extends to include processes only relating to on-site processing and generation. These include on-site calcination and fuel consumption processes and emissions associated with an individual company's own distribution network. Off-site power generation processes deployed within cement and concrete manufacturing are exempt.

Cement Initiative

Credit for waste-derived fuel and biomass sources of energy consumed will be accommodated. The Cement Sustainability Initiative--a cross-industry association of 10 of the largest concrete and cement producers in the EU--has already implemented many of the process-specific and abatement mechanisms that predate the greenhouse gas protocol practices and reporting standards put in place by the World Council for Sustainable Development. In effect, much of the groundwork for the EU-ETS was already done before the Commission came on board.