On Wednesday 2nd September Redshaw Advisors held a hugely popular webinar to shine some light on the free allocation process and what companies can expect to receive in Phase IV. We ran a poll at the beginning of the session on the question: “What is your level of understanding of the Phase IV allocation changes for your installation?” and it soon became very clear why the webinar was so popular.
The results are charted below, most interesting to note was that after 15 years of the EU ETS, which is poised to grow in coverage, only 18% of respondents were 100% clear on the Phase IV allocation process. The rest of the respondents indicated that their level of understanding was 50% or worse (6% of respondents had no understanding at all). Bear in mind that the webinar was an ‘installations only’ event and that the potential cost to installations of not knowing how free allocation will affect their company’s bottom line is significant (EUA prices are above €28 as we write). Therefore, the result suggests that the free allocation process is so complex that many companies don’t have the capacity or know-how to work out their free allocation for themselves.
The presentations from Simon Watson, Tom Lord and myself started with an overview of the European Commission’s (EC) Phase III free allocation process. This was followed by a summary of how that is known to be changing from 2021 and what other major changes to expect. The webinar finished off with a look at what companies could expect in Phase IV based on 3 scenarios: 1. staying on the leakage list, 2. remaining off the leakage list and 3. dropping off the leakage list. In each case we modelled 3 benchmark improvement rate scenarios. We showed that, subject to individual circumstances, most companies would have been marginally better-off in 2021 relative to 2020 free allocation due to the ending of the Cross Sectoral Correction Factor (CSCF), however those being hit by a 24% benchmark improvement rate (breaking news subsequent to the webinar of a leaked EC document informed us that the 24% rate would be applied to most sectors) would typically get less. Those installations falling off the leakage list (more sectors are removed from leakage protection than are kept on it) had their free allocation drastically cut, as would be expected.
The EU Green Deal continues to hit the headlines and the higher emissions reduction ambition promoted by the EC is expected to cause further changes to free allocation during Phase IV. This is due to both lower overall availability of EUAs and because any Carbon Border Adjustment Mechanism (CBAM) will likely strip free allocation from industries protected by it. So we ran another poll asking the question: “How do you see the Green Deal working from 2023?”. 44% of respondents saw this as an effective solution for the EU to meet its environmental ambitions. However, at the same time 40% of respondents saw it as a further threat to EU manufacturing. We conclude from this that while the Green Deal may be broadly supported, the EC needs to work harder on making sure that industry is protected and better informed of that protection. Only by EU industry being provided with the tools to implement new technologies and processes will the EU be able to resist the exporting of production, and therefore emissions, outside of its borders.
We are happy to make the slides and webinar recording available to companies with installations covered by the EU ETS. Please get in touch with us if you would like to receive a copy or if you would like to know more about how we model Phase IV free allocation for our customers.