Restoring the ETS - perspective from a cement compliance company

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1 Strength. Performance. Passion. Restoring the ETS - perspective from a cement compliance company Carsten Schirmeisen, Holcim Climate Change Platts European Emissions Markets 2012, Carsten Schirmeisen, Holcim Ltd

2 Agenda 1. Is there a problem with the EU ETS? 2. What s at stake? 3. What are the root causes? 4. EC s structural change suggestions (1 of 2)? 5. Consider other structural measures (1 of 2) 2012 Holcim Ltd 1

3 Is there a problem with the EU ETS? Environmental objective well on track Credibility issue windfall profits Future leakage exposure status and allocation at risk? Hindrance to rationalisation Distortion of competition within and between companies Predictability issue price collapse Limits incentive to invest in carbon efficient technologies Returns on investments in CO2 offsets defaults Effects on future leakage exposure status? 2012 Holcim Ltd 2

4 Agenda 1. Is there a problem with the EU ETS? 2. What s at stake? 3. What are the root causes? 4. EC s structural change suggestions (1 of 2)? 5. Consider other structural measures (1 of 2) 2012 Holcim Ltd 3

5 What s at stake? Loss of confidence by top management in ETS ETS CO2 price signal relevant? Driver to invest in CO2 efficiency in capex constrained world? EU industrial base not fit for future CO2 efficiency requirements Risk of production leakage Political will to continue with ETS Mixture of country in-/ actions differing CO2 regulations across EU Vision of global CO2 market No more UN top-down, but bottom-up linkage of CO2 markets At risk if biggest and longest operating ETS becomes irrelevant No internal abatement required by compliance entities 2012 Holcim Ltd 4

6 Agenda 1. Is there a problem with the EU ETS? 2. What s at stake? 3. What are the root causes? 4. EC s structural change suggestions (1 of 2)? 5. Consider other structural measures (1 of 2) 2012 Holcim Ltd 5

7 What are the root causes? 1) Fixed overall supply cap set well in advance 2) Allocation based on fixed, historic baselines: Phase II 2005 emissions Phase III Intensity Benchmark x historic production 3) Overlapping and competing policies ETS, Renewable Energy targets and support schemes, EED 4) International offsets Fixed quota set under a scarcity scenario with high prices Meant as a pressure-valve and developing country incentive 2012 Holcim Ltd 6

8 Agenda 1. Is there a problem with the EU ETS? 2. What s at stake? 3. What are the root causes? 4. EC s structural change suggestions (1 of 2)? 5. Consider other structural measures (1 of 2) 2012 Holcim Ltd 7

9 EC s structural change suggestions (1 of 2)? The EC s plan of attack backload now, structural changes later. Ideas on structural change: 1) Reduce Supply: Increase reduction target above current -20% by 2020 Increase current annual reduction factor of -1.74% 2) Increase Demand: Increase scope of ETS, but not cap, by bringing in other sectors Consideration: No solution to underlying, structural problem of rigid system. Achieves scarcity. But if too tight and no accompanying measures loss of marginal production from EU. Will again trigger calls for further adjustments Holcim Ltd 8

10 EC s structural change suggestions (2 of 2)? 3) Clarify future targets: Define 2030 reduction target Consideration: Political reliability of long-term targets? Would it trigger industrial technology investments? Would it trigger change in market prices? Locks in even further one side of the equation 2012 Holcim Ltd 9

11 Agenda 1. Is there a problem with the EU ETS? 2. What s at stake? 3. What are the root causes? 4. EC s structural change suggestions (1 of 2)? 5. Consider other structural measures (1 of 2) 2012 Holcim Ltd 10

12 Consider other structural measures (1 of 2) Key issue is allocation on fixed, historic baselines Allocation: Benchmark x median Production (or 2009/10) x cross-sectoral reduction factor Suggestion: Replace historic with actual production NZ and Australia allocate on actual production by ex-post adjustment in following year for over-/ under-production. No uncertainty as company knows volume and CO2 intensity of its current production, so knows whether ex-post adjustment required. a) Strong growth: Increase of production and likely emissions, possibly beyond cap. Government (EC) can ensure cap by purchasing international offsets in growth-scenario funds available. b) Strong recession: Allocation shrinks in-line with reduced production. No windfall profits, no inhibition of rationalisation. No false signal of ETS delivers environmental objective Holcim Ltd 11

13 Consider other structural measures (2 of 2) Issue of fixed total supply (cap): Suggestion: Flexible, forward adjustments of cap Annual review of cap with 5 years advance notice Provides short- / medium clarity to industry Enables adjustment to actual economic conditions However, how administered? Review committee with advisory capacity and government deciding. Suggestion: Automated review based on fixed formula Provides clarity and certainty if parameters are well defined and in public domain Risk of tying to mathematical process does it capture reality? 2012 Holcim Ltd 12

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