European steelmakers’ association Eurofer tells Kallanish that plans to introduce a Market Stability Reserve (MSR) “already in 2018” will severely impact the steel industry. This is because it will come in advance of any moves to protect the region’s steel industry from the higher costs.

"This will substantially increase carbon and electricity prices three years before improved and adequate measures against carbon leakage come into force in 2021, for which the details are not yet known. For this reason, we plead that the measures against carbon leakage will be introduced at the same time as the MSR, based on realistic impact assessments for industrial sectors such as steel," says Axel Eggert, director general of Eurofer.

Eggert’s comments come as the European Parliament's environment committee has adopted changes to the EU Commission’s proposal for an MSR, which will work in tandem with the EU Emissions Trading Scheme (ETS). The MSR will withdraw some of the excess CO2 allowances from the market in order to boost carbon prices, as an incentive to reduce emissions with the aim of slowing climate change.

The committee’s decision of 24 February to implement the MSR in 2018 instead of 2021 will “immediately refer 900 million [CO2] allowances into the reserve. In addition, it proposes putting hundreds of millions of allowances from plant closures into the reserve,” explains Eurofer. Key governments including Germany, France and the UK wanted the MSR’s introduction advanced to 2017: the move by the committee is thus seen by some as a compromise.

Nonetheless, Eurofer concedes that the committee’s decision is not all bad. It “welcomes today's decision to safeguard sectors exposed to carbon leakage, such as the steel industry, at the level of the most efficient installations,” says Eggert. This is a strong signal for the need “to establish predictability for industry", he adds.

Eurofer also welcomes the committee's proposal to provide additional funding for the demonstration phase of promising innovative technologies. But, the association stresses that, “decisions to invest in Europe can only be made if the climate and energy targets are technically and economically feasible and do not lead to costs, which our global competitors do not have to bear. An early start for MSR will however, not provide this incentive to the steel industry [because …] the sector will be increasingly short of allowances well before 2021,” and higher CO2 prices could impact on electricity costs, he claims. Others see this as a form of special pleading.

The EU’s CO2 watchdogs decided in March 2013 to implement the MSR as an additional tool to limit allowances, because they could not retro-actively amend the previously agreed allocations.

Initially under the ETS, the supply of CO2 allowances was to be gradually restricted. However, the post-crisis industrial slump has meant that many steel companies have had ample permits, as their provision is based on much higher historical crude production levels.

According to the Commission, “in the aftermath of the severe economic crisis the system is characterised by a structural imbalance between the supply and demand of allowances.” This has “resulted in a surplus of around 2 billion allowances not needed for compliance.”