Carbon market omission: The cement industry
The cement industry has huge potential for emission reductions and innovation, but the current EU carbon market rules don’t reward industry frontrunners. On the contrary, the over-generous allocation of free pollution permits favours big incumbents.
Donal O’Riain, CEO of Ecocem, a specialised producer of GGBS cement.
If necessity is the mother of invention, then perhaps profitability is the father of idleness. In attempting to defuse business opposition to its climate policy, the EU has allowed an extremely profitable industry, the cement sector, to stifle innovation and competition, and avoid making its contribution to the collective effort to reduce greenhouse gas (GHG) emissions. This Monday (20 June), Europe’s Environment Ministers have an opportunity to change the game as they discuss how to reform the EU Emissions Trading System.
The irony is that, despite the assumption that the cement sector in the EU is a mature market, its potential for innovation – and for dramatically reducing its environmental footprint – remains substantial. The company I run, Ecocem, has developed a cement substitute that can reduce the carbon footprint of concrete by over 50%.
Within laboratories and start-ups across Europe, enormous similar opportunities exist to transform the sector, and reduce carbon emissions at the same time. But lobbying by powerful incumbents has neutered the effect of the EU Emissions Trading System (EU ETS), and skewed the rules of the game against innovators.
Cement sector must start reducing emissions now
Europe’s cement industry is large and powerful, and accounts for a significant part of the EU’s GHG emissions. According to Cembureau, the European trade association for cement, our sector employed nearly 45,000 people in 2013, generating €17.5 billion. In 2015, the cement sector was responsible for 144 million tonnes of carbon dioxide (CO2) emissions – more than twice the amount my home country, Ireland, emits per year.
This poses a major challenge now that the Paris Agreement has set the direction of travel for the decades to come: as an energy-intensive industry with historically high emissions, we are one of the sectors that needs to reduce emissions drastically.
Given the long lifetime of investments in the cement sector, efforts to cut emissions through technological innovation must hence start now. But the large incumbents are showing little inclination to make investments that will disrupt their own, highly profitable business models. Indeed, they have used their lobbying power to resist change, including changes in technology.
The ETS has led to wind-fall profits for big polluters
Incumbents such as LafargeHolcim and Heidelberg Cement have insisted on getting free allocation of carbon credits from the ETS, claiming that it is necessary for their survival and competitiveness. In 2013 for example, Lafarge stated that “unequal carbon pricing place(s) … the cement sector in particular at risk of carbon leakage”.
As a result of its powerful lobby, this group of companies managed to secure an over-generous free allocation of emission allowances. Rather than losing money by paying for their pollution, these cement companies have made over €4.7 billion in profits from the EU ETS since 2008.
Another argument we often hear is that industries need time to adapt to the new policy frameworks. Let’s talk business then – according to environmental think-tank Sandbag, the cement sector will have sufficient free allowances to cover its emissions up to 2030 under current rules. This would mean that the EU ETS is giving the sector 25 years before it needs to start thinking about reducing greenhouse gas emissions, while the low-carbon transition needs to happen today if our industry is to have a future.
Worse still, the flooding of the EU ETS with excess carbon permits is not only delaying the urgently needed low-carbon transition of the cement industry, it also punishes companies who show that low-carbon solutions in the cement sector are not only possible, but also profitable.
New entrants, with clean cement technology, are not incentivized under the ETS. The reductions in carbon emissions they achieve are credited to their cement competitors in the form of additional free carbon credits. The ETS rewards the polluters for the positive impact of their green competitors! We in Ecocem know this to our cost: since our establishment in 2002, we have reduced CO2 emissions by over 6mt and as a result have seen the ETS give additional credits to a value of €40m to our cement competitors.
So, how can the EU institutions and member states help? Firstly, they can ensure that emitters pay an adequate price for their carbon emissions, by introducing a steeper decarbonisation pathway under the EU ETS. This would increase the cost of traditional, high carbon cement, incentivizing innovation.
Secondly, the EU should work to dismantle norms that unfairly bar new, proven products entering the market place. The public sector needs to create a market for innovative companies and products in order to unleash the considerable expertise that already exists within Europe, and propel the region back to its place among the world’s leaders in innovation.