1 Nachhaltiges Energie- und StoffstrommanagementMSc Umweltwissenschaften, Uni Freiburg, SoSe 2016 Nachhaltiges Energie- und Stoffstrommanagement Stefan Pauliuk Applications, Teil I: A consumption-based charge for emissions-intensive materials

2 Contents Reducing GHG emissions: top-down vs. bottom upThe EU Emissions Trading System (EU-ETS) Carbon leakage A consumption-based charge for material-intensive commodities

3 1) Top-down vs. bottom-up strategies to reduce carbon emissionsClimate change is a global problem. A main indicator of human-induced climate change is the global budget of carbon emissions by 2050 (Meinshausen 2009). How do we make sure that the mitigation effects of the many different strategies add up? Global climate agreement: Common but differentiated responsibility National and regional emissions reduction targets  ‘Hard’ instruments: Carbon cap, phasing out of certain technologies by law  ‘Soft’ instruments: involve economic incentives, mediated by markets Combining both perspectives: Cap-and-trade system + Government allocates or sells a limited number of emissions permits. + Polluters are required to hold permits in amounts equal to their emissions. + Polluters trade permits until Pareto-optimal emissions level is achieved. Source: DOI: /nature08017

4 2) The EU Emissions Trading System (EU-ETS)Cornerstone of cost-effective reduction of industrial GHG in the EU By far the largest cap-and trade system, covers more than 11,000 power stations and industrial plants in 31 countries, (EU28 + Iceland, Liechtenstein, and Norway) as well airlines Covers about 45% of the EU’s GHG emissions By 2020, the total cap for the sectors covered will decrease by 21% compared to 2005 levels. A reduction of 43% for has been proposed by the European Commission The 2013 cap for emissions from power stations and other fixed installations within the system was set at 2,084,301,856 allowances, which corresponds to GHG emissions of Gt/yr. In its third phase, reaching from 2013 to 2020, 40% of all emissions allowances are auctioned, the rest is allocated for free, share of freely allocated emissions declines each year.

5 Does the EU Emissions Trading System actually work?Common criticisms include: Over-allocation of allowances, cap may be too high, thus voiding incentives for emissions reduction Windfall profits due to free allocation (explained below) No coverage of imported products and materials  The EU-ETS is continuously being improved! https://www.man.com/NO/why-cop21-could-solve-global-carbon-dilemma

6 3) What is carbon leakage and how to deal with it?Many emissions-intensive commodities (steel, cement, Al, pulp/paper) are traded on global markets. Unilateral taxation of GHG emissions on these materials for EU producers could reduce competitiveness of the domestic material production industries Relocation of these industries to countries with lower or no carbon taxation and subsequent imports of the products to the EU might be the consequence. This phenomenon is called carbon leakage. Carbon leakage is an example of a spill-over effect (Nebeneffekt) of climate policy. To address the risk of carbon leakage, the EU-ETS includes free allowances for GHG emissions to producers with significant carbon costs and internationally traded products Free allowances apply to the cement and steel industries, which together account for about 40% of the EU’s industrial GHG emissions!

7 How does free allocation work?CO2 per ton Each year, all companies under the scheme receive free emissions permits according to their production levels and the current benchmarks Company 1 receives all allowances needed for free. Company 2 receives less allowances than needed, and can reduce its emissions intensity or buy additional allowances on the market. Company 3 receives more allowances than needed and can sell those on the market to actors like company 2. Company 2 (0.86 t/t) Benchmark: product-specific, reflecting the average GHG emissions of the 10% best performing installations in the EU (for cement) Company 1 (0.766 t/t) Company 3 (0.72 t/t)

8 Free allocation and windfall profits (‘Überraschungsgewinne’)“Free allocation can deliver windfall profits to sectors which pass through some or all of the cost of allowances to their consumers. These sectors pass on their opportunity costs on to their consumers of having to use freely allocated allowances for compliance instead of being able to sell it. “ Translating this statement into understandable language: Some producers receive emissions allowances for free. (In the first phase of the EU-ETS, this included the power sector). Some energy suppliers partly pass on the market value of freely obtained CO2-emission rights to their customers, thus making ‘money for nothing’ (windfall profit). The argument is that energy suppliers have to use these allowances instead of being able to sell them, which represents a lost opportunity, and they charge their costumer for this opportunity cost. There is an academic debate about the extent to which windfall profits due to free allocation actually happen. Many actors argue to abandon free allocation in favour off full auctioning.

9 ‘Inclusion of Consumption’, (IoC)4) A consumption-based charge for material-intensive commodities: ‘Inclusion of Consumption’, (IoC) How to ‘fix’ the problems resulting from free allocation and carbon leakage? Border tax adjustments: Auction allowances at full carbon price, adjust prices at borders Only works if no free allowances are given Needs careful design to be compatible with WTO regulations. Consumption-based charge: Instead of charging producers, the consumers of material intensive goods directly pay the bill!  Consumers less mobile than producers  Consumers would eventually have to pay anyway  Material-intensive products contribute to high standards of living and wellbeing  Potentially easier to implement than border tax adjustments

10 A consumption-based charge addresses the risk of carbon leakageStatus quo Source: Draft report IoC, Neuhoff et al. (2016), provided on ILIAS

11 A consumption-based charge can re-establish carbon-related price signals along the value chainSource: Draft report IoC, Neuhoff et al. (2016), provided on ILIAS

12 How does ‘Inclusion of Consumption’, (IoC) work?Source: Draft report IoC, Neuhoff et al. (2016), provided on ILIAS

13 How does ‘Inclusion of Consumption’, (IoC) work?Liabilities are created upon material production within the EU28 Companies within duty suspension arrangement (DSA, Steueraussetzungsvereinbarung) can pass on liabilities to their customers Companies and customers outside the DSA but within the EU28 have to acquit the liabilities. Trade across the borders of the EU28 is monitored Source right: Pauliuk et al. (2016), Technical report on IoC, provided on ILIAS

14 How high are the charges related to IoC?Material Total production, EU , (Mt) EU-ETS benchmark tons of CO2-eq/ ton of material) Liability per ton (EUR) Total liability created within EU28 (MEUR) Steel 160 1,355 41.0 6,600 Aluminum 3.6 12.35 370.0 1,330 Plastics 57 0.442 13.0 740 Paper/Pulp 37 0.378 11.0 410 Cement 170 0.766 23.0 3,900 Carbon price: EUR/t of CO2 30 Sum 13,000 Source: Pauliuk et al. (2016), Technical report on IoC, provided on ILIAS

15 How does IoC affect the value chain?Source: Pauliuk et al. (2016), Technical report on IoC, provided on ILIAS

16 IoC: Monitoring of imports and exports to and from the EU28Source: Pauliuk et al. (2016), Technical report on IoC, provided on ILIAS

17 Apparent Consumption ACGuidance for the exercise: There are two ways of including international trade Process 1 2 Production P Apparent Consumption AC Export E Import I Market Process 1 2 Export E Import I Domestic shipment DS Both ways provide the same information, and one can be transformed into the other: P = DS + E AC = DS + I DS = P – E = AC - I Source: Lecture slide Daniel B Müller, NTNU

18 Nachhaltiges Energie- und StoffstrommanagementMSc Umweltwissenschaften, Uni Freiburg, SoSe 2016 Nachhaltiges Energie- und Stoffstrommanagement Stefan Pauliuk Applications, Teil II: Material efficiency in the steel cycle

19 Content Outlook on the steel cycle Why material efficiency and how does it work? Scenario analysis of material efficiency in the global steel cycle

20 The Chinese Steel cycle 1990Source: DOI: /es201904c

21 The Chinese Steel cycle 2010Source: DOI: /es201904c

22 The Chinese Steel cycle 2050?Source: DOI: /es201904c

23 Background Backbone: Current steel stocks in use are 14±2 tonnes per person for the US, UK, Germany, Japan Growth: Population growth and economic development lead to sustained growth in demand for metal services Scrap: Next to growing stocks, existing stocks have to be replaced Emissions: Steel production alone accounts for almost 10% of global energy- and process related GHG emissions ≥50% global GHG emission cut: The 21st century’s challenge to the steel industry

24 Research questions STEEL: How may global steel demand and scrap supply evolve during the 21st century assuming development according to the stock pattern observed in ICs? Will there be a “peak steel”? CO2: What (known and new) emission abatement strategies are there for the steel cycle and on which scale do they have to be implemented to reduce the sectoral carbon footprint by 50 % by 2050 ? (3) BEYOND: How robust are our results? How could steel industry, manufactures, users, and policy makers respond to the climate challenge and the strategies proposed?

25 System definition

26 Constructing the upstream modelSource: DOI: /es302433p

27 Steel use so far...

28 Introduction to the model – key assumptions IFuture stock trajectory and transition Generalised logistic function: Saturates at level S Continuous slope in 2008 Reaches saturation at given time normally distributed lifetime North America Europe CIS Japan+S. Korea China India Africa

29 Global per capita stock by product category

30 Final demand by region

31 Global final demand by product categoryPostconsumer and fabrication scrap supply Postconsumer scrap supply

32 Liquid metal production, 2000-2100, BaselineSecondary steel Primary steel

33 Modelling: calculating steel sector emissions

34 Introducing the six material efficiency strategies

35 Material efficiency I: less metal, same serviceSource: chapter 12, DOI: /es

36 Material efficiency II: More intense useSource: chapter 17, DOI: /es

37 Material efficiency III: Lifetime extensionSource: chapter 16, DOI: /es

38 Material efficiency IV: Re-use of steel scrapSource: chapter 15, DOI: /es

39 Material efficiency V: Fabrication yield improvementSource: chapter 13, DOI: /es

40 Material efficiency VI: Fabrication scrap diversionSource: chapter 14, DOI: /es

41 Modelling: future emissions factorsWhat might affect process emissions factors in the future? Adoption of best practice for conventional technologies – top gas recycling, fuel substitution, motor improvements The development of novel technologies – smelt reduction, electrolysis, advanced direct reduction Decarbonisation of electricity CCS

42 Modelling: emissions scenarios1 DR share is defined relative to total crude steel production; 2 Smelt reduction and electrolysis share is defined relative to the massflow entering the BOF.

43 Results: future process emissionsAnnual CO2 production (Mt CO2) 2050 target Business as usual Energy efficiency Energy & material efficiency

44 Main result: Emissions from steel production and recyclingPolicy makers: The emissions targets can only be met by vigorous pursuit of energy and material efficiency across all product groups New industries will be required to service and maintain material efficient goods Steel producers: A significant shift in steel production technologies will take place with large growth in EAF and alternative ironmaking technologies, and a large decline in conventional BF production Product designers: New products will be required to embrace material efficiency principles – particularly lightweighting and more intense use The trend of decreasing product lifetime will have to be overcome – separating steel from fashion ALSO: Contraction and convergence

45 Material Efficiency 2050 Scenario: Scenario comparison Development ‘business as usual’ Material Efficiency 2050 Scenario: Dramatic decline of primary steel production No new blast furnaces until 2060 Use end-of-life scrap from countries with mature steel stocks to build up infrastructure in developing countries Secondary steel Primary steel Full scale material efficiency by 2050

46 Key results for different stakeholdersPolicy makers: The emissions targets can only be met by vigorous pursuit of energy and material efficiency across all product groups New industries will be required to service and maintain material efficient goods Steel producers: Large growth in EAF and alternative ironmaking technologies, large decline in conventional BF production Product designers: New products to embrace material efficiency principles – particularly lightweighting and more intense use Separating steel from fashion and increase lifetime!