The cement - EU ETS Kaleidoscope Holcim Group Support Bruno Vanderborght Vice President...

The cement - EU ETS Kaleidoscope

Holcim Group Support

Bruno VanderborghtVice President Environmental Strategy Holcim Group

Paris, 05 September 2006

2

IEA - Cement – EU ETS 05.09.2006Holcim Group Support

Voluntary Corporate commitment

EU ETS objective and means

Evaluation of the EU ETS for the cement industry

Summary & Conclusion

The future

3


Holcim’s CO2 emission reduction objective

Holcim's objective is to reduce by the year 2010 the Group

average specific net CO2 emissions per ton cement by 20%

from the reference year 1990, as to WBCSD cement protocol

definitions.

This reduction will be achieved through improving four key eco-

efficiency parameters: clinker factor (increasing MIC) thermal substitution rate (increasing AFR) specific thermal energy consumption (improved energy

efficiency) reducing cement kiln dust disposal.

4


Holcim(Europe) performance in corporate commitment

: Specific gross & net CO2 emissions

520

540

560

580

600

620

640

660

680

700

720

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

[kg

CO

2/t

cem

pro

d]

Specific gross CO2 emisssions Specific net CO2 emissions

2000 – 2005 (WBCSD protocol definitions): 5,0 % decrease of gross specific

emission per ton cement 6,2 % decrease of net specific

emission per ton cement 3 % clinker factor reduction Fuel mix, a.o. + 1,7 % biomass ~33 Mton cement produced in 2005

666

633

Holcim(Europe)

1,08 Mton (process + fuel) gross CO2 prevented in 2005 compared to the same cement production with year 2000 specific emission

0,2 Mton indirect savings in 2005 due to fossil waste as fuel

Would those real CO2 reductions be rewarded in the EU ETS?

632

593

5






The future

6


Objective of Emissions Trading System (ETS)

1. Reduce emissions more effectively

2. At lower cost

3. Foster economy and employment

4. Long-term

5. Investments in clean technology

Emissions Trading is a means,

not an objective

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The future

8


Criteria for evaluation of ETS’s success

Environment:

Are the CO2 emissions lower than without the ETS ?

Cost, Competitiveness and Competition Is the emission reduction at lower cost than without the ETS?

How are competitiveness and competition affected?

Technology:Does the system provide a long-term sustainable improvement ?

Does the system foster investments in clean technology?

Does the system reward all drivers to reduce emissions ?

Trading:What is / how evolves the CO2 price?

How does the CO2 price influence management decisions?

9


Influence of the Emissions Trading System

Strategy & Risk

Executive Committee Board of Directors

Production

MonitoringProcurement

Finance & Administration

Marketing & Sales

Engineering

Communication

Emissions Trading

CO2 is integrated in business systems

Quality of Monitoring & Reporting has significantly improved

CO2 has a market price

0

5

10

15

20

25

30

35

CO2 price is factored in electric power price, and financial analyses

10


Influence of the Emissions Trading System

Strategy & Risk

Executive Committee Board of Directors

Production

MonitoringProcurement

Finance & Administration

Marketing & Sales

Engineering

Communication

Emissions Trading

CO2 is integrated in business systems

Quality of Monitoring & Reporting has significantly improved

CO2 has a market price

0

5

10

15

20

25

30

35

CO2 price is factored in electric power price

Management attention and price indications possibly lead to a start of a reduction of emission per unit of production

Order of magnitude ~1 %

11


-25

-20

-15

-10

-5

0

5

10

15

20

750 800 850 900 950 1'000 1'050 1'100 1'150 1'200

CO2 efficiency of installation

Pro

cen

t sh

ort

/ l

on

g p

osi

tio

n

Percent short / long of real cement installations as a function of CO2 efficiency

Rea

l situ

atio

n w

ith N

AP

200

5-07

, E

mis

sion

Bas

ed A

lloca

tion

High emission is rewarded with excess of initial allowances

Low emission is punished with shortage of initial allowances

Up to 40 % difference in initial allowances for equal installations

Influence of National Allocation Plans (NAP)

12



-35

9.9

13.1

17.2

26.6

35.1

66.9

-60 -40 -20 0 20 40 60 80

Power & Heat

Pulp & Paper

Oil & Gas

Cement, Lime, Glass

Other

Metals

Industry

Allowances minus Emissions in Mton

(3.6%)

(16.7%)

(17.3%)

(8.1%)

(7.1%)

(21%)

(-3.3%)

Distortion of competition between sectors

Distortion of competition between companies

Distortion of competition between countries

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

CEM CMX COL CRH HBG HOL ITA LAF UNI

Germany France Italy Spain

UK Benelux Other Western Eastern

All distortions are without environmental basis

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Reasons for Difference Allowances & Emissions 2005

1. Decrease or less growth of production, mainly due to economic development since reference period, partially as a consequence of marginal cost of CO2

2. Decrease of production for export

3. Better monitoring & reporting

4. Willingness of governments to protect their industry in an international competition, during allowance allocation process

5. The psychology of absolute caps during the allowance allocation negotiations

14



Performance of low clinker factor is not rewarded, quite the contrary

Reductions through investments in energy efficiency are not rewarded, quite the contrary they are rather punished

Indirect savings from fuel switch to fossil waste are not rewarded

Decrease & relocation of clinker production are rewarded

The time horizon of the allocation periods (3 – 5 years) is much too short to stimulate investment decisions. Investment decisions are deferred.

15






The future

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Preliminary evaluation of ETS’s success

Environment:









Management attention, price signal and better monitoring & reporting lead to small emission reductions

Increased electric power cost leads to search for options to reduce

Change from compliance to opportunity management (trading) is a managerial mindset change

17


Preliminary evaluation of ETS’s success

Environment:









18


Experience from one year EU ETS 2005 - 07

The NAPs 2005-07:

Give the wrong signals

Do not reward the key drivers for reduction in the cement industry

Create undue distortion of competition without environmental justification, within EU and outside EU

Are ineffective in their environmental and economical objective

Are a subsidy for companies facing decreasing economic activity, production and export

19


Experience from one year EU ETS 2005 - 07

The origin of the deficiencies is in the National Allocation Plans, not the Emissions Trading Directive

The deficiencies risk to undermine the confidence of industry in the effectiveness of the Emissions Trading System

Emissions Trading System: Yes

Current Allocation Methodologies: No

20






The future

21


Improvements to the EU ETS

1. Allowance Allocation through Benchmarking Performance Benchmarking (CO2 / ton cement) (ex ante) Real production volumes (ton cement / year as realized) (ex post)

2. Long term Long-term Converging Differentiated Benchmarking

3. Integration in International Framework Include in scope of ETS: Import installations Benchmarking in CDM

22


Performance Based Allocation (Benchmarking)

Percent short / long of same cement installations as a function of CO2 efficiency

Sam

e in

stal

latio

ns

Per

form

ance

Bas

ed A

lloca

tion

sam

e to

tal a

lloca

tion,

sa

me

envi

ronm

enta

l res

ult

-30

-25

-20

-15

-10

-5

0

5

10

15

20

750 800 850 900 950 1'000 1'050 1'100 1'150 1'200

CO2 efficiency of installation

Pro

cen

t sh

ort

/ l

on

g p

osi

tio

n

Gives the right signals:

Performance is rewarded, Polluters pay

Discussion on differences between equal installations are futile, compared to differences in case of grandfathering

23


Long-term Converging Differentiated Benchmarking

“Old” Process / product

“2005 BAT” Process / Product

“Innovative” Process / Product

Stick

Carrot

Carrot

Asset adaptation Transition time

Converging Differentiated Benchmarks

BaU

Present industry average

Long-term target

CO

2 em

issi

on p

er

uni

t of

pro

duct

ion

200

5

200

8

201

2

201

5

202

0

202

5

203

0

203

5 year

204

0

gran

dfat

herin

g =~

Bench

mar

king

=

CONDIF

Bench

mar

king

trans

ition

=

24


Integration in International Framework

Developed economies

Developing economies

Regional Benchmark

Installation / Project

Sell Sell

Installation / Project

Buy / Reduce

No obligation

Production & Import installations

Production installations

Including Installations for Import in ETS prevents leakages & undue distortion due to import

25


Read more on www.holcim.com

1. The efficiency principle

2. EU Emissions Trading System

3. National Allocation Plans

4. Performance Based Allocation for 2008-12

5. PBA applied to the cement industry

6. Absolute versus Specific targets

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The future

Sectoral approach

27


Efficiency * Incentive = Result

Efficiency in production, products, consumption

Policy measures to stimulate market and behaviour

Absolute emission reduction, economic & social development

X =

General Principle of Emission Reductions and Social & Economic Development

Efficiency targets and policy measuresshould be tailored for each sector

IndustryTransportBuildings

AppliancesAgriculture

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General Principle of EU ETS

Voluntary CDM

X =

Non Annex 1 Parties

BuildingsTransport


Industry

BuildingsTransport


IndustryX =

EU Member State

Efficiency Incentive Result

29


General Principle of Sectoral Approach

Efficiency Standards

Implementation Mechanism

Resulting Absolute Reduction

X =

Industries

Transport

Buildings

Appliances

Agriculture

Population

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