Reforming the Emissions Trading System (ETS) for greater competitiveness

Entrepreneurs from the Italian ceramic industry are calling for a major overhaul of the ETS, with the posibility of its temporary suspension in the meantime. Giovanni Savorani, Chairman of Confindustria Ceramica, emphasised, “I hope that the new European legislature, parliamentarians and our country will address the urgent need for adjustments to the ETS to ensure an immediate rebalancing. While waiting for potentially lengthy structural reforms, I believe it should not be considered taboo to contemplate temporarily suspending the ETS mechanism. In fact, situations of serious risk call for radical measures.” The ETS is a European-only regulatory mechanism aimed at reducing CO2 emissions. However, it has proven ineffective from an environmental perspective and has negatively impacted industries across the continent, like the ceramic industry, which despite only generating 1% of emissions, makes up 10% of ETS participants and which – precisely because of this system – is excluded from the 5.0 incentives. The sector consumes 1.5 billion cubic metres of gas and 1.5 billion kilowatt-hours of electricity annually. Savorani himself went on to say that newly elected European representatives “must ask themselves whether the ETS, as currently structured, is providing adequate answers to the climate issue or does it not instead risk having the paradoxical effect of making it harder, or perhaps even impossible, to achieve the shared goal of decarbonising production processes in Europe.” It is also necessary to finalise the inclusion of the ceramic industry in the guidelines for state aid to obtain compensation for indirect costs, particularly those related to electricity prices. 

Italian ceramic tile industry: Trend of CO2 Emission Factor The ceramic tile industry consumes 1.5 billion cubic metres of gas and 1.5 billion kilowatt-hours of electricity annually. The consumption of gas and production processes results in approximately 3.5 million tonnes of CO2 emissions per year, equal to about 1% of national emissions and 3% of the industry’s total emissions.

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All this was discussed in the webinar “A Reform of the ETS for the Sustainability of European Manufacturing: The Case of Ceramics. Notes for the new European Legislature,” organised by Confindustria Ceramica and moderated by the association’s director, Armando Cafiero. Ceramic tiles are produced using a thermal process that for many years has been dependent on the combustion of natural gas, which generates 98% of CO2 emissions. While companies in the sector have long been adopting measures to improve their efficiency, there are still no real technological alternatives that would allow them to reduce their emissions any further. In the absence of significant technological breakthroughs or the availability of sufficient quantities of green fuels in the foreseeable future, the ETS functions as a “tax” rather than fulfilling its intended role as a driver of environmental innovation. 

European Union 27: climate-changing gas emissions
Million tonnes of CO2 equivalent

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Davide Tabarelli, Chairman of Nomisma Energia, presented an update on a study commissioned by Confindustria Ceramica with the contribution of UniCredit. This study assessed the impact of the EU Emission Trading System on the ceramic industry, particularly following the sharp increase in CO2 prices and the approval of the new ETS directive in May 2023. Tabarelli pointed out that “the ceramic industry has been a net payer in the ETS for years. This means it receives fewer allowances than necessary to cover its emissions (the shortfall is currently 40%), which adversely affects its international competitiveness.” In this system, the industry is experiencing obvious paradoxes. Europe is pushing for the electrification of production processes while excluding the ceramic industry from compensation for indirect ETS costs. This measure has been designed to partially offset the loss of international competitiveness caused by the ETS mechanism. Regarding the 2026-2030 free allocations, there is a need to advocate for changes in the calculation methods. Not only that. “Cogeneration systems, which are universally recognised as the most efficient technology currently available,” Tabarelli added, “are penalised by the criteria used for allocating emission allowances, as companies that invest in them do not receive free allowances for their higher gas consumption. All this discourages investment in a technology that, to date, guarantees the best and most rational use of gas and ensures a certain reduction in direct and indirect process emissions. “Moreover,” Tabarelli said, “the ETS mechanism, which should accompany manufacturing on the path to decarbonisation, has instead been left in the hands of financial speculation, which drains resources away from companies and jobs.” Other possible interventions are necessary to rebalance the situation. Currently, the guidelines of the European Commission’s Directorate-General for Competition (DG Competition) unfairly penalise the ceramic industry and other industries like glass and chemicals, by excluding them from compensation for indirect ETS costs, even though this is provided in the directive. This frustrates the drive towards process electrification and further deteriorates international competitiveness. 

 

Carbon Border Adjustment Mechanism – How will it work?
Producers within the EU are required to purchase ETS allowances to cover their production costs, which are determined by  the carbon content of their products. Conversely, importers of products, as identified by the CBAM regulation, will need to compensate for the price difference between their imports and EU-produced goods by purchasing CBAM certificates. This ensures that the carbon costs are aligned for both domestic and imported products.

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As a result, Italian ceramic tile producers, which export one third of their production outside the EU, find themselves having to pay the costs of the ETS twice. “It is important,” argued Aurelio Regina, Confindustria’s Energy Delegate, “that the ceramic industry and other currently excluded industries are included among those benefitting from compensation for indirect costs, which is essential for restoring competitiveness.” Regina added, “Italy faces significant structural gaps: the Single National Electricity Price in April was €87/MwH compared to €13 in Spain, and the Italian PSV is on average 5-7% higher than the TTF. Germany and France have also implemented substantial measures to lower energy costs.” In light of a possible inclusion of ceramics in the Carbon Adjustment Border Mechanism (CBAM) during the pilot phase (2023-2025), it is necessary to take advantage of the many uncertainties to request specific changes to the mechanism. These changes should include maintaining 100% free allocations for exports, securing guarantees on the effectiveness of policies in the countries from which ceramics are imported, and clarifying the technical aspects of the CBAM that remain uncertain. Politicians involved in the debate also shared the concerns of companies and the consequent need to prioritise the timing and methods of the energy transition in the next European legislature, including reconsidering ETS inconsistencies in order to implement necessary changes.

Average cost of tile production in the main producing countries

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“The ceramic industry,” said Elisabetta Gualmini, MEP and President of the European Parliament Ceramics Forum, “is a major exporter and plays a significant role in the country’s growth and social cohesion. Environmental policy must align with industrial policy, recognising that there is no short-term alternative to natural gas. In this legislature, we have obtained the inclusion of bricks, tiles and sanitary ware in the climate guidelines, and secured around €10 million in state aid. We have also succeeded in amending the directive on construction products to ensure that emissions are calculated over the entire life cycle of ceramics, also taking into account their durability and not only the indicator relating to short-term production. We have also obtained the exclusion of the ceramic industry from the packaging directive. The Commission’s willingness to review the ETS will also necessitate identifying ad hoc measures to protect the industry.”
At the same time, Stefano Cavedagna, an elected member of the European Parliament, emphasised that “it is essential to protect both Italian and European industries from unfair international competition to ensure that employment is maintained in Italy – a goal that has been achieved only to a limited extent so far. Greta Thunberg is correct in saying we live on one planet, but it is imperative for the whole world to recognise that European emissions account for only 8% of the total. The goal should be for the entire world to do its part. “It is important,” Cavedagna concluded, “to consider temporary suspensions of the ETS application during its review. In addition,  the ceramic industry must become one of the reference industries of DG Industria”. 
MEP Massimiliano Salini reiterated that the “ETS is based on a flawed assumption: that sustainable development can exist without manufacturing. It is important to clarify this aspect of the ETS reform pathway to all political parties in the European Parliament. Given that the ceramic industry exports globally, we must protect our companies from international competition by using traditional anti-dumping measures and applying the safeguard clause, as has been done successfully in the steel industry. The current setup of the CBAM is completely wrong. To comply with WTO rules, we either need to approve all proposed export rebates or reconsider the CBAM altogether.”

(Article by Andrea Ghiaroni - andrea.ghiaroni@gmail.com - pubblished in "CER il giornale della ceramica" no. 405 magazine)