1. ETS Post 2020 The view of Italian steel industry on carbon leakage Flavio Bregant Director General EPP ENVI/ITRE Hearing on ETS Post 2020 Bruxelles, 4 May 2016

2. Carbon Leakage in the steel sector is a reality TT EPP ENVI/ITRE Hearing on ETS Post 2020 Bruxelles, 4 May 2016 Import penetration rate on apparent consumption of steel products in Italy in 2015 was higher than 50%. In Italy, the second steel producer country in EU, in 2015 the growth of apparent steel demand (+10.1%) was offset, on the supply side, by the sharp increase of imports (+21.9%), mainly from China. Chinese steel carbon intensity is more than three times the Italian one. The decrease of emissions in developed countries is in part due to growing imports in carbon-intensive products from developing countries. It can be demonstrated 1 that the EU’s apparent CO2 domestic emission reduction (territorial emissions) has been more than offset by CO2 emissions transfer, i.e. emissions embedded within imported goods. 1) Peters et al. (2011), Growth in emission transfers via international trade from 1990 to 2008. USA Rest of Kyoto Annex B Total Kyoto Annex B Italian steel primary products Apparent consumption vs Import penetration The EU Steel sector is totally unable to pass through CO2 cost into steel prices, without losing market share. A recent study by CE Delft, suggesting a different picture, is affected by evident methodological flaws which bring to misleading conclusions. It is at odds with the everyday-reality of a sector which is highly exposed to an uneven international playing field and suffers from unfair practices, such as dumping and global overcapacity.

3. EPP ENVI/ITRE Hearing on ETS Post 2020 Bruxelles, 4 May 2016 ETS post2020 Commission Proposal 1)Compensation of indirect cost is limited, optional and state aid based → no protection from indirect CL + intra EU distortion of competition 2)Fixed auctioning share at 57% and cap to free allocation → unavoidable application of correction factor CSCF 3)Flat rate reduction of benchmark (-1%/year) without proper consideration of real performances and technical or economical feasibility → additional hidden correction factor cutting free allowances below best performers’ level Inadequate protection from direct and indirect carbon leakage for sectors highly exposed to international competition. Even the best performer within the steel sector will suffer unbearable costs due to the shortage of free allocation and cost transferred in electricity prices. Total carbon costs (direct +indirect) for the EU steel sector in the period 2021- 2030: € 34 billion (48% shortage in free allowances in 2030) 1. Such costs would wipe-out most of the sectors’ profitability, deterring investments and jeopardising the global competitiveness 1) : Ecofys study published in November 2015 THE PROBLEM

4. EPP ENVI/ITRE Hearing on ETS Post 2020 Bruxelles, 4 May 2016 ETS post2020 Commission Proposal THE PROBLEM: limited, optional and state aid based indirect cost compensation Commission Proposal: “Member States may should adopt financial measures in favour of sectors or sub-sectors which are exposed to a genuine risk of carbon leakage due to significant indirect costs that are actually incurred from greenhouse gas emission costs passed on in electricity prices” Currently very few member states are doing so and state aid guidelines will allow offsetting of only a part of these costs. The substitution of the word “may” into “should” does not provide any legal certainty that indirect carbon costs will be offset in all member states, and this will cause the continuation of the current unacceptable competition distortion within EU. Indirect CL is as important as direct CL. Carbon costs passed through in electricity prices are a major threat for the competitiveness of electro-intensive industries at risk of carbon leakage, like steel and in particular EAF steel.

5. EPP ENVI/ITRE Hearing on ETS Post 2020 Bruxelles, 4 May 2016 ETS post2020 Commission Proposal 1)Fully harmonised indirect cost compensation scheme at EU level, by using allowances from auctioning pot or from MSR. Indirect CL should be given the same importance as direct CL and managed in the same way at EU level → level playing field 2)The fixed ratio between the amount of free allocation and auctioning should be revised: the share of free allocation should be raised at least to 50% of the cap → elimination of CSCF 3)Future benchmarks should be based on real and consistent industry data and set effectively at the level of 10% most efficient installations. Data collection and processing should be transparent and involve industry in all steps → achievable BM based on real performance A REALISTIC SOLUTION This solution will not affect the EU reduction target and it is more suitable to achieve climate goal, by avoiding carbon leakage and by preserving the capacity of EU industry to invest in innovation Most efficient installations in sectors at risk of losing international competitiveness “will not face undue direct or indirect carbon costs leading to carbon leakage”. More than 90% of the industry (those plants whose performance is not within the best 10%) is incentivised to invest to catch up with the benchmark

6. EPP ENVI/ITRE Hearing on ETS Post 2020 Bruxelles, 4 May 2016 ETS post2020 Commission Proposal THE PROBLEM : flat rate reduction of BM The linear flat rate is arbitrary, does not reflect the real technological progress in a sector and will cut free allocation below best performers’ level.