EU carbon trading scheme may drive prices of raw materials up

By Gregory Roumeliotis

- Last updated on GMT

The UK's chemical industry has given a cautious welcome to the
government's national allocation plan (NAP) for Phase 2 of the EU
Emissions Trading Scheme (ETS), warning pharma could see a rise in
the price of active pharmaceutical ingredients (APIs) and

The Chemical Industries Association (CIA) concedes that manufacturing escapes direct cost increases from the second phase of the scheme but claims it is inevitable that higher indirect costs will be transmitted through the electricity market.

This is because the plan requires additional carbon emissions reductions from the electricity supply industry (ESI) and also proposes to auction a margin of their allowances rather than allocate them for free.

Phase 2 of the ETS runs from 2008 to 2012 to coincide with the first Kyoto Commitment Period, during which the industry is allocated emissions 'allowances', equivalent to a tonne of carbon dioxide, which can be traded, encouraging companies which can reduce emissions to do so cheaply and sell their unused allowances.

"How much prices of pharmaceutical raw materials rise depends on the extent to which producers have suffered increased costs from the creation of a market price for CO2 and are able to pass them on, though their ability to pass through is likely to have been limited by exposure to international competition,"​ Nick Sturgeon, manager of the CIA's Broking and Trading Agency (CIABATA), told​.

"In fact, a number of pharmaceutical sites are covered by the ETS so are directly impacted by the scheme."

The higher prices that pharma may face though will be mainly down to the electricity industry passing on its increased expenses to chemical firms.

What is more, imposition of tougher targets on the ESI will encourage more switching from coal to gas as the primary energy source, aggravating the acute problems already being experienced in the UK gas market.

Supply problems last winter in Britain triggered record high spot market prices and many energy intensive manufacturers were forced to curtail production, so as a result forward wholesale prices for the next three winters are all well above those available to competitors in continental Europe and elsewhere, according to the CIA.

The chemical industry is currently in phase 1 of ETS which covers the chemical sector, including pharma, to the extent of on-site energy activities with a thermal input rating of more than 20MW - that is boilers, combined heat and power (CHP) and electricity generators.

"We believe that in phase 1 the ESIs have passed through both the majority of their incurred CO2 costs - incurred through their allocation shortfall - and the opportunity cost - of holding and not selling their free allocation,"​ Sturgeon said.

"They are able to do this because they are not exposed to international competition and this will continue in phase 2 and may increase through the impact of auctioning."

The total cost to chemicals is estimated at £100m (€143m) in phase 1 and while this was significantly below the impact on electricity costs from increased oil and gas prices, it was still equivalent to the full cost of the climate change levy before the 80 per cent relief the industry got though participation in the climate change agreements.

The CIA says the greatest potential for reduction now lies with commerce, transport and households, which are not covered by the ETS and therefore enjoy a lesser impact from climate change measures.

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