European chemicals industry faces €1.5bn carbon bill

KARLSRUHE, GERMANY (ICIS)–In 2021, EU chemicals producers under the EU’s cap and trade system could face a carbon bill of €1.5bn – more than double the €600m charged last year – due to a fall in the amount of free handouts and a rise in the price of emission allowances.

Europe’s chemicals industry accounted for 8% of emissions covered in the EU’s emission trading system (EU ETS) in 2020. To protect it from high costs and competition from non-EU producers, the industry received most of its allowances for free, limiting the need to actively trade within the scheme.

Following a reform of the EU ETS in 2018, lawmakers tightened the system significantly and European carbon prices started to rise significantly. Overall, the bill for the chemical sector has increased drastically to hit around €600m in 2020.

The start of the fourth trading period of the EU ETS in 2021 also marked a significant change in how many allowances are allocated for free to all industrial sectors. With a significant downward revision of the chemicals industry benchmarks of up to -24% for the 2021-2025 free allocation period, ICIS expects the number of free allowances to significantly decline from 2020 to 2021 resulting in the short position of the sector to further increase to, on average, 35m in the next years.

On top of the significant cut in free allowances, EUA prices hit an all-time high above €45/tCO2e in 2021, yielding a significant carbon bill of above €1.5bn annually for the chemicals industry.

The EU’s Green Deal adds more price uncertainty. The Climate Law, signed on 22 April 2021, includes a net greenhouse gases (GHG) emissions reduction target of 55% vs. 1990.

ICIS Analytics foresees a scenario of above €90/tCO2e possible by 2030 if the legislator moves forward with its very ambitious proposals.

A longer version of this article will be published in ICIS Chemical Business on Friday 7 May as part of the ICIS Top 100 Chemical Distributors.