The cement EU ETS Kaleidoscope

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The cement - EU ETS Kaleidoscope
Bruno VanderborghtVice President Environmental
Strategy Holcim GroupParis, 05 September 2006
Holcim Group Support
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• Voluntary Corporate commitment
• EU ETS objective and means
• Evaluation of the EU ETS for the cement industry
• Summary Conclusion
• The future

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Holcims CO2 emission reduction objective
Holcim's objective is to reduce by the year 2010
the Group average specific net CO2 emissions per
ton cement by 20 from the reference year 1990,
as to WBCSD cement protocol definitions.

• This reduction will be achieved through improving
  four key eco-efficiency parameters
• clinker factor (increasing MIC)
• thermal substitution rate (increasing AFR)
• specific thermal energy consumption (improved
  energy efficiency)
• reducing cement kiln dust disposal.

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Holcim(Europe) performance in corporate commitment
Holcim(Europe)

• 2000 2005 (WBCSD protocol definitions)
• 5,0 decrease of gross specific emission per ton
  cement
• 6,2 decrease of net specific emission per ton
  cement
• 3 clinker factor reduction
• Fuel mix, a.o. 1,7 biomass
• 33 Mton cement produced in 2005

666
633
632
593

• 1,08 Mton (process fuel) gross CO2 prevented in
  2005 compared to the same cement production with
  year 2000 specific emission
• 0,2 Mton indirect savings in 2005 due to fossil
  waste as fuel

Would those real CO2 reductions be rewarded in
the EU ETS?
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• Voluntary Corporate commitment
• EU ETS objective and means
• Evaluation of the EU ETS for the cement industry
• Summary Conclusion
• The future

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Objective of Emissions Trading System (ETS)

• Reduce emissions more effectively
• At lower cost
• Foster economy and employment
• Long-term
• Investments in clean technology

• Emissions Trading is a means,
• not an objective

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• Voluntary Corporate commitment
• EU ETS objective and means
• Evaluation of the EU ETS for the cement industry
• Summary Conclusion
• The future

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Criteria for evaluation of ETSs success
Environment Are the CO2 emissions lower than
without the ETS ? Cost, Competitiveness and
Competition Is the emission reduction at lower
cost than without the ETS? How are
competitiveness and competition
affected? Technology Does the system provide a
long-term sustainable improvement ? Does the
system foster investments in clean
technology? Does the system reward all drivers to
reduce emissions ? Trading What is / how evolves
the CO2 price? How does the CO2 price influence
management decisions?
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Influence of the Emissions Trading System
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Influence of the Emissions Trading System

• CO2 is integrated in business systems
• Quality of Monitoring Reporting has
  significantly improved

Management attention and price indications
possibly lead to a start of a reduction of
emission per unit of production Order of
magnitude 1

• CO2 has a market price

• CO2 price is factored in electric power price

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• Influence of National Allocation Plans (NAP)

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• Influence of National Allocation Plans (NAP)

• All distortions are without environmental basis

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Reasons for Difference Allowances Emissions 2005

• Decrease or less growth of production, mainly due
  to economic development since reference period,
  partially as a consequence of marginal cost of CO2

• Decrease of production for export

• Better monitoring reporting

• Willingness of governments to protect their
  industry in an international competition, during
  allowance allocation process

• The psychology of absolute caps during the
  allowance allocation negotiations

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• Influence of National Allocation Plans (NAP)

• Performance of low clinker factor is not
  rewarded, quite the contrary
• Reductions through investments in energy
  efficiency are not rewarded, quite the contrary
  they are rather punished
• Indirect savings from fuel switch to fossil waste
  are not rewarded
• Decrease relocation of clinker production are
  rewarded
• The time horizon of the allocation periods (3 5
  years) is much too short to stimulate investment
  decisions. Investment decisions are deferred.

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• Voluntary Corporate commitment
• EU ETS objective and means
• Evaluation of the EU ETS for the cement industry
• Summary Conclusion
• The future

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Preliminary evaluation of ETSs success
Environment Are the CO2 emissions lower than
without the ETS ? Cost, Competitiveness and
Competition Is the emission reduction at lower
cost than without the ETS? How are
competitiveness and competition
affected? Technology Does the system provide a
long-term sustainable improvement ? Does the
system foster investments in clean
technology? Does the system reward all drivers to
reduce emissions ? Trading What is / how evolves
the CO2 price? How does the CO2 price influence
management decisions?

• Management attention, price signal and better
  monitoring reporting lead to small emission
  reductions
• Increased electric power cost leads to search for
  options to reduce
• Change from compliance to opportunity management
  (trading) is a managerial mindset change

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Preliminary evaluation of ETSs success
Environment Are the CO2 emissions lower than
without the ETS ? Cost, Competitiveness and
Competition Is the emission reduction at lower
cost than without the ETS? How are
competitiveness and competition
affected? Technology Does the system provide a
long-term sustainable improvement ? Does the
system foster investments in clean
technology? Does the system reward all drivers to
reduce emissions ? Trading What is / how evolves
the CO2 price? How does the CO2 price influence
management decisions?
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Experience from one year EU ETS 2005 - 07

• The NAPs 2005-07
• Give the wrong signals
• Do not reward the key drivers for reduction in
  the cement industry
• Create undue distortion of competition without
  environmental justification, within EU and
  outside EU
• Are ineffective in their environmental and
  economical objective
• Are a subsidy for companies facing decreasing
  economic activity, production and export

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Experience from one year EU ETS 2005 - 07
The deficiencies risk to undermine the confidence
of industry in the effectiveness of the Emissions
Trading System
The origin of the deficiencies is in the National
Allocation Plans, not the Emissions Trading
Directive
Emissions Trading System Yes Current
Allocation Methodologies No
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• Voluntary Corporate commitment
• EU ETS objective and means
• Evaluation of the EU ETS for the cement industry
• Summary Conclusion
• The future

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Improvements to the EU ETS

• Allowance Allocation through Benchmarking
• Performance Benchmarking (CO2 / ton cement) (ex
  ante)
• Real production volumes (ton cement / year as
  realized) (ex post)

• Long term
• Long-term Converging Differentiated Benchmarking

• Integration in International Framework
• Include in scope of ETS Import installations
• Benchmarking in CDM

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Performance Based Allocation (Benchmarking)
Percent short / long of same cement installations
as a function of CO2 efficiency
Same installations Performance Based Allocation
same total allocation, same environmental
result
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Long-term Converging Differentiated Benchmarking
Converging Differentiated Benchmarks
Stick
Carrot
Carrot
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Integration in International Framework
Developed economies
Developing economies
Production Import installations
Production installations
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Read more on www.holcim.com

• The efficiency principle
• EU Emissions Trading System
• National Allocation Plans
• Performance Based Allocation for 2008-12
• PBA applied to the cement industry
• Absolute versus Specific targets

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• Voluntary Corporate commitment
• EU ETS objective and means
• Evaluation of the EU ETS for the cement industry
• Summary Conclusion
• The future
• Sectoral approach

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Efficiency Incentive Result
General Principle of Emission Reductions and
Social Economic Development
Efficiency targets and policy measuresshould be
tailored for each sector
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General Principle of EU ETS
Efficiency
Incentive
Result
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General Principle of Sectoral Approach
Efficiency Standards
Implementation Mechanism
Resulting Absolute Reduction
X