Non-governmental organizations (NGOs) are pushing for operators in the European Union who use scrap metal in steel production and clinker substitutes in cement-making to be handed free EU carbon allowances to spur decarbonization.
Clinker is a mix of limestone and minerals that is mixed with other materials to make cement, and the process of converting limestone is a carbon-intensive process. Clinker substitutes are available, however, and can be scaled up if EU policy encourages their use.
An EU Commission expert group on climate change policy composed of NGOs, industry associations and member states has met multiple times during the year to revise directives related to the different mechanisms of the cap-and-trade EU Emissions Trading System.
Representatives of Sandbag, a climate policy nonprofit, the European Environmental Bureau, a network of citizen organizations in the bloc, and the World Wildlife Fund European Policy Office (WWF EPO) said that the directives would be presented in the coming weeks or months to allow additional public consultation. The EU Council and Parliament will then choose whether or not to approve the measures by the end of the year.
Camille Maury, a senior policy officer on industrial decarbonization at WWF EPO, said that the allocation of free allowances, in place since 2005, has delayed the industry’s green transition.
“As steel and cement sectors will continue to receive free permits to pollute until 2034 [when the free allowance system is phased out for the two sectors], now is a crucial time to look at how these freebies are allocated and to whom,” Maury said.
“The EU ETS benchmarks must be revised to finally support circularity [and] improve energy efficiency rather than only carry on financing the incumbents. This [free allocation regulation] revision is an opportunity to translate the ambition of the revised EU ETS, agreed in 2022, and make sure it delivers the most ambitious outcome for the climate.”
Redirecting Free EUAs to Less Carbon-Intensive Steel
Riccardo Nigro, a senior policy officer with the European Environmental Bureau, said the steel benchmark currently rewards carbon-intensive processes involving blast furnaces, lime making, coking and inputs that include virgin iron ore.
Currently, there is no incentive to use scrap metal — and the EU Commission’s proposed reforms do not aim to change that — as free allowances are handed out on the basis of the tonnage of hot metal or direct reduced iron (DRI), said Adrien Assous, the executive director of Sandbag. Steel manufacturers that use more scrap metal as part of their input for flat steel production do not receive more free EUAs, while operators that rely on more virgin iron ore inputs receive large amounts of free EUAs.
“It definitely doesn’t cover scrap and our worry is that Europe, the number one exporter of scrap steel, doesn’t know what to do with all this scrap. We send it to Turkey and instead of that we could reuse it and turn it into flat steel products. That would avoid a lot of carbon emissions,” Assous said.
Assous explained that the EU Commission’s proposed revisions to the current rules disincentivize decarbonization or metal recycling by basing free EUA allocation on steel production processes, not the final steel product itself. Under the current free allocation rules, operators who use scrap metal in their steel manufacturing have to pay more than operators who use virgin iron ores, doing away with the incentive to turn to the less carbon intensive input, Assous noted.
“Free allocation [of permits] is given in proportion not of the steel output but of the most polluting component of steel: hot metal. [Hot metal is] an intermediary state of steelmaking and it’s produced in blast furnaces and uses a lot of coal,” Assous said. “But free allocation is given out per ton of hot metal and not of steel, so we’re trying to [convince the EU] that free allowances should be given per ton of steel [produced] and not of hot metal used.”
In a letter in May 2023 to the EU Commission expert group, Sandbag pushed for the inclusion of scrap steel.
“The use of scrap has indisputable climate benefits, roughly reducing emissions by two tons of carbon dioxide per ton of steel scrap used,” the climate non-profit wrote. “It also saves other scarce resources such as electricity compared to other techniques such as hydrogen [direct reduced iron]. Its use should therefore be encouraged at least as much as other abatement techniques.”
Focusing on the final steel product as opposed to the different processes involved in steelmaking will incentivize decarbonization in the sector and will provide operators who use steel scraps in their business with free EUAs, Sandbag argued.
Nigro remarked that the phasing out of free allowances by 2034 under the EU ETS is an important milestone, with the EU’s carbon border adjustment mechanism (CBAM) fully implemented by then and applying the bloc’s carbon price to
imports. With a decade left for free allowance allocation, Nigro said that steelmaking processes that reduce carbon emissions deserve free allowances.
“We’re…10 years away from [the phaseout of free allocation] and basically we want policy reflecting that there are other production processes that should be given more free allocation,” Nigro said.
Clinker-less Cement as an Alternative
Similarly, cement manufacturers do not receive the same amount of free allowances for using clinker substitutes in cement production.
According to the Alliance for Low-Carbon Cement and Concrete (ALCCC), a group composed of 18 low-carbon cement producers, clinker accounts for more than 90% of the sector’s carbon emissions and clinker in cement in Europe averages
around 75%, higher than the global average of 63%. Revising the current cement benchmarks under the EU ETS to include clinker alternatives would reward operators who use less carbon-intensive processes with free carbon allowances.
“The ongoing review of the allocation rules of free emissions under the ETS is a key opportunity for driving this change…the ALCCC is strongly in favor of updating the existing [cement production] benchmark…The current benchmark, based on clinker, has and will not incentivize clinker substitution,” the group said in a statement in August.
“Clinker is the most polluting component in cement and there isn’t really an incentive to reduce emissions even if there are alternatives to clinker,” Assous said. “The free allocation rules are now going to include more alternatives to clinker and this could possibly go quite a long way – though not fully — to solve the problem.”
The ALCCC has called on the EU to give preference in free allocations to processes with the “greatest mitigation potential” including clinker-lowering technologies and alternative binder technologies that rely on supplementary cementitious material or non-clinker based chemistries.
“In line with the ETS directive, it is important that the new [cement] benchmark is both process- and feedstock-neutral, as such putting the right incentives in place for types of technologies,” the ALCCC said in a July statement.
Joren Verschaeve, a program manager at ECOS, an environmental NGO based in Brussels, and affiliate of the ALCCC, told OPIS that the revisions to the EU ETS regulation would also be a chance to push decarbonization as the CBAM is
implemented.
“With the rollout of CBAM, at some point the [steel and cement] benchmarks will become irrelevant and there’s this discrepancy because Europe tries to push other markets to have their own emissions trading systems inspired by CBAM,”
Verschaeve said.
–Editing by Anthony Lane, alane@opisnet.com
Starting Oct. 1, 2023, importers of downstream products including iron, steel, aluminum, electricity, fertilizers, cement and hydrogen into the European Union will need to report the carbon intensity level of these products to the Carbon Border Adjustment Mechanism (CBAM) Authority on a quarterly basis.
Importers won’t have to pay any carbon levies just yet but are expected to do so by 2026 when the CBAM enters into full effect. While the CBAM will cover these sectors first, it’s highly likely that this tariff will increasingly include more downstream products and indirect emissions and, by 2030, cover all the sectors under the EU Emissions Trading System (EU ETS).
So, what is the CBAM?
To understand CBAM, we need to understand the EU Emissions Trading System (EU ETS), the carbon market that will determine the price of CBAM certificates, in other words how much importers will need to pay to cover the cost of emissions embedded within their imports.
Since 2005, the EU has required industry within its borders to pay a market-based carbon cost under the EU ETS. In theory, the EU ETS aims to incentivize manufacturers to invest in decarbonizing by applying the principle of “polluter pays.” This means the more carbon dioxide an operator emits during manufacturing, the more money it should pay. With a limited number of EU carbon allowances (EUAs), which are expected to disappear by 2039, the price of pollution is expected to increase over the coming years. Exporters and importers in the EU will now have to keep the price of EUAs in mind: EUAs reached an all-time high in February, trading as high as €100.70 ($106.54)/mt and, more recently, traded at €85.27/mt on Sept. 25, 2023.
Within the EU, the bloc provides hard-to-decarbonize sectors such as steel and cement manufacturers with free EU carbon allowances. However, with the introduction of the CBAM, this free allocation will be phased out gradually. EUAs will come to an end entirely by 2034 as the CBAM is simultaneously rolled out.
Essentially, free EUA allocation will be out and CBAM certificates will be in.
The CBAM is part of the EU’s Fit-for-55 reform to reduce greenhouse gas emissions by 55% based on 1990 levels by 2030. The CBAM was provisionally agreed to by EU bodies in December 2022 and finally adopted by the EU Council in April 2023.
With the EU having the most expensive carbon allowance in the world, entities sending their products to the EU will face the high carbon costs that EU industry is currently required to pay. According to the EU, the CBAM “would mirror the EU ETS effects for non-EU producers” and “encourage other countries to establish carbon pricing policies.”
What is reported under CBAM?
EU importers will have to monitor and report the carbon emissions embedded in the products in question to the newly-created CBAM Transitional Registry on a quarterly basis starting Oct. 1, and the first report is due by Jan. 31, 2024. Importers won’t have to pay the carbon levy until Jan. 1, 2026.
Those reporting data will need to provide: the total quantity of each type of product based in metric tons; the installation where the product was made; the total number of embedded emissions in tons of carbon dioxide for each ton of the product; country of origin and carbon price paid abroad.
When the CBAM enters into full effect starting Jan. 1, 2026, the EU will require importers to file annual declarations by May 31 each year. The declarations will detail the amount of carbon emissions embedded in imported products during the last calendar year and how many CBAM certificates will be required to cover those emissions.
For countries that already include a carbon cost — for example, China also has its own ETS albeit at a substantially lower cost than that of the EU — European importers will have to prove that a carbon price has been paid in a third country. As a result, the importer can deduct that cost from the CBAM certificate.
Parties that do not report their CBAM declarations will face penalties of between €10 to €50 per metric ton of unreported emissions.
Importers are those who will need to purchase the CBAM certificates, which will be calculated on the average weekly auction price of the EU ETS. If there are no auctions in a given week, the average of the previous week stands. CBAM certificates cannot be traded and will have limited validity.
What will the next few years look like for CBAM?
The transitional phase, from Oct. 1, 2023, to Dec. 31, 2025, will correspond to sectors with the highest risk of carbon leakage and with the highest carbon intensity in their products: iron and steel, cement, fertilizers, aluminum, hydrogen and electricity.
The EU has said that the CBAM would eventually cover more sectors and that indirect emissions would also be included.
The full CBAM will come into force on Jan. 1, 2026.
“With this enlarged scope, CBAM will eventually — when fully phased in — capture more than 50% of the emissions in ETS-covered sectors,” the EU said. “The objective of this transition period is to serve as a pilot and learning period for all stakeholders (importers, producers and authorities) and to collect useful information on embedded emissions to refine the methodology for the definitive period.”
By 2030, the EU will likely extend the CBAM to cover all of the sectors already included within the EU ETS such as oil refining, upstream, all metals, pulp and paper, glass and ceramics, imports related to the aviation and maritime shipping sectors, and lime and chemicals.
What does this mean for energy trade?
As CBAM takes shape over the few next months, more and more countries with existing carbon schemes are considering implementing their own CBAMs. Earlier this year, the Australian and British governments voiced their support of a carbon tariff; countries like the US, Canada and Japan are considering doing the same.
Other countries like India and China, both of whom are among the world’s largest steel producers, have shown their opposition to the EU’s carbon levy, calling it a protectionist measure and bringing up complaints to the World Trade Organization. According to consultancy firm Wood Mackenzie, the carbon costs on steel alone could amount to a 56% increase for India and a 49% increase for China by 2034.
As exporters to the EU face climbing carbon costs, many will likely divert their carbon-intensive products to countries without carbon levies while sending less carbon-intensive products to the EU.
According to Wood Mackenzie, prices on commodities and products are likely to rise in the EU and low-carbon producers will have the chance to seize higher margins within the EU market. The consultancy firm’s research shows that the CBAM could provide more than $9 billion in revenues from the covered sectors by 2030.
Carbon capture and sequestration technology has been heralded by some as a savior for the US ethanol industry, but CapCO2 Solutions CEO Jeff Bonar insists that he has a better one.
Bonar’s company has collaborated with Adkins Energy to take steps to build the first facility to convert ethanol plant waste CO2 to green methanol.
“The Adkins board has approved the project. We’re just about done with the engineering study,” said Bonar.
The plan is to produce green methanol on-site at Adkins’ ethanol plant in Lena, Illinois. The output is expected to eventually reach 84,000 metric tons per year.
There seems to be little doubt in Bonar’s mind that the project will reach fruition.
“I’m very confident. Eighteen months ago, it wasn’t clear that there was an economic case for green methanol. Now, there’s a huge economic case for it. The production and demand for green methanol fuel is through the roof.”
Methanol is used in thousands of everyday products, according to Bonar, including insulation, gutters, roofing, paints, carpets, tires, plastics, fertilizers, cosmetics and even Lego bricks.
Methanol can also replace diesel fuel, he said, adding: “The traditional method of manufacturing methanol is fossil-fuel intensive, but ethanol can be made ‘green’ by using captured biogenic C02 emissions and renewable energy.”
When green methanol is burned, it adds no new CO2 to the atmosphere, according to Bonar, making it a net-zero fuel.
“Methanol burns with no waste products, and even if spilled causes no environmental damage,” he said.
In addition to replacing carbon-intensive traditional methanol in consumer products, Bonar says it “can easily be used as a transportation fuel because conventional diesel engines can be inexpensively modified to run on green methanol.”
As evidence of green methanol’s popularity, Bonar offers the shipping industry, which he claimed “is pretty much standardized on green methanol,” citing its usage by Maersk and Amazon.
“There are now more than 200 ships commissioned to use green methanol. Even Disney Cruises has commissioned a green methanol ship. So there’s just no worry about green methanol being an important fuel.”
Technology Licensed From EU-based Company
CapCO2 says its technology, licensed from EU-based Real Carbon Tech, is efficient and easily deployed. CapCO2 has exclusive rights to sell it in the US.
The technology was developed by a researcher at a university in the Netherlands. It was commercialized by Real Carbon Tech, an engineering firm in Poland, and is already deployed at a cement plant there.
“The technology is basically proven. So what could go wrong? Now we just have to get it working in an ethanol plant, and I think the floodgates open.”
The company is concentrating on ethanol facilities because the output is greater, according to Bonar.
In addition, ethanol plant locations are “far simpler than the existing cement plant location,” he said, “so we don’t have any big engineering problems.”
The process is environmentally friendly, Bonar has said, because it captures carbon before it is released into the atmosphere, adding: “Also exciting are byproducts that can be sold as commodities rather than transported by pipeline and buried as waste.”
Furthermore, Bonar notes that the lower carbon index of green methanol makes it eligible for premium prices in low-carbon fuel markets.
There are other people pursuing green methodology, Bonar noted, “but they don’t have the technology.”
“Real Carbon Tech has three families of patents in 60 countries,” he said, “so I’m not worried about an immediate competitor for exactly their technology.”
A small pilot unit being built now is expected to be done by the middle of next year. That would be followed by 12 to 24 months to build a full-scale facility. Both are to be deployed at the Adkins plant.
“One of the advantages of our technology is that it’s modular,” Bonar said. “The pilot is one shipping crate. The full scale is eight shipping crates, all on the same patch of ground next to the plant.”
Financing Not Expected to be a Problem
“There are lots of people who want to loan money for a capital project that they know is going to produce revenue over 15, 20 or 25 years,” Bonar said. “We just have to have one plant proven working to do that.”
The US Dept. of Energy has a program in which “essentially they guarantee the loan for large infrastructure,” according to Bonar, who added: “They’ve said, ‘Your stuff sounds great. Get one running, and we’re very interested in guaranteeing financing for the full-scale project.'”
Bonar indicated that he can envision a scenario in which his company teams up with the carbon capture and sequestration projects planned in the Midwest.
“I could see the proposed pipelines ending up licensing our technology, concentrating some biogenic CO2 into a region and then having a methanol plant there,” he said.
Biogenic CO2 is the key ingredient for a diverse and valuable family of net-zero chemicals and fuels, according to CapCO2.
“If I were them, I’d be working on that hard because the burying of CO2, I don’t think, is a good business,” Bonar added. “Yeah, the government will pay you to do it for a few years, but is that really the model?”
CapCO2’s plan is to have 20 to 40 installations completed five years from now.
“We may set up a factory in either Illinois or Iowa or somewhere like that and build these shipping crates and crank them out,” Bonar said. “That would be a way to scale it up much more quickly than one at a time.
“We’ve got our hands full to do that for the next two years. We are busy. Right after that, who knows?”
In the meantime, Bonar will presumably keep extolling the virtues of his endeavor.
“Investing in pipelines rather than green methanol,” he says, “is the equivalent of investing in slide rule technology when the future is computing.”
–Editing by Jordan Godwin, jgodwin@opisnet.com
Six European Union-based plants operated by five cement industry giants — Holcim Group, CEMEX, Buzzi Unicem, Votorantim Cimentos and Cementos Portland Valderrivas — were issued a surplus of €88.2 million ($95.2 million) in free European Union emissions allowances (EUAs) from 2019 to 2022 despite the installations being idle or emitting tiny amounts of carbon in a calendar year, an OPIS review of EU data shows.
Nature markets are still in their infancy, but the Kunming-Montreal Global Biodiversity Framework agreed by almost 200 nations at COP15 in Montreal in December 2022 was a signal to investors that these could become billion-dollar markets in the coming years.
The British government announced amendments to its emissions trading system (UK ETS) on July 3, 2023, that would cut the number of permits available to carbon emitters over the rest of the decade and extend the scope of the scheme to the domestic shipping and waste incineration sectors.
Three European facilities operated by Saudi Arabian chemical giant SABIC, U.K. conglomerate INEOS and French oil major TotalEnergies received a combined total of about $127 million in free carbon permits from the British and French governments, even though the plants were offline or emitting very little carbon, an OPIS review of official data shows.
“Cap and trade” is a regulation designed to reduce greenhouse gases by setting a firm limit – or cap – on emissions.
Despite criticisms of REDD+ projects and a decline in related carbon credit prices this year, offsets issued by the Kasigau Corridor REDD+ project in Kenya have consistently commanded a price premium in the voluntary carbon market.
Washington’s highly anticipated Cap-and-Invest Program is well underway and building momentum as the state’s carbon emitters gain clarity on market dynamics and prepare for the second auction at the end of May 2023.